a. Calculation of Activity Rate WorldTime Company produces two watches, Premium and Deluxe that sells for $123 and $108 respectively. In 2020 the company produced and sold 15,000 Premium and 10,000 Deluxe watches. Manufacturing overhead costs for 2020 was $900,000. Below are the direct costs of Premium and Deluxe. WorldTime would like to use Activity Based Costing to allocate its manufacturing overhead costs. Direct Manufacturing costs per watch Premium Deluxe Direct materials $600,000 $300,000 Direct labor $195,000 $120,000 Activity Capacity Activity Rate Activity Costs . . = Activity Machine setups Assembly Inspecting Packing products General factory admin. | - Setups Machine hours No. of inspections Units produced Labor hours per setup per machine hour per inspection . The following information is for Activity Based Costing (ABC): per unit per labor hour Activity Machine setups Assembly Inspecting Packaging products Factory administration Activity Activity Activity Cost Driver Capacity $240,000 Setups 1,500 setups 350,000 Machine hours 50,000 machine hours 100,000 Inspections 400 inspections 60,000 Units produced 25,000 units produced 150,000 Labor hours 30,000 labor hours $900,000 Use of Activity Premium Deluxe 500 1,000 setups 30,000 20,000 machine hrs. 100 300 inspections 15,000 10,000 units produced 18,000 12,000 labor hours Deluxe Activity usage x rate Overhead Allocatied to Deluxe b. Calculation of total overhead allocated to Premier and Deluxe Overhead Premium Allocatied Activity Activity usage x rate to Premium Machine setups Assembly Inspecting Packaging products General factory admin. Total overhead allocated = ||||||||| = Selected account balances for the year ended December 31, 2020: Research and Development expense 120,000 Salaries payable...... 8,000 Depreciation of office equipment 30,000 Unearned Rent Revenue.. 4,000 Selling expense 110,000 Prepaid advertising 6,000 Administrative expense 115,000 Short-term investments 6,500 Restructuring costs 20,000 Interest expense 2,300 Dividend paid ..... 3,000 Accumulated depreciation, office equipment 60,000 Common stock..... 125,000 Loss on sale of investments. 2,500 Required: a. Calculate the activity rate for each activity driver (round to two decimal points if necessary) b. Compute the total overhead allocated to Premier and Deluxe watch. c. Compute the per unit overhead for each watch d. Calculate the unit cost of each watch using Activity-Based Costing (round to two decimal points if necessary). e. Prepare WorldTime multiple-step income statement for the year ended December 31, 2020. c. Calculation of overhead per watch: Overhead = No. of watches Premium: Deluxe: overhead per watch overhead per watch d. Unit cost of a watch: Premium Deluxe Direct materials Direct labor Overhead Total unit cost
