Allocate overhead using a single plantwide rate, multiple department rates, and activity$-$based costing

Big Sound Inc. manufactures two products: receivers and loudspeakers. The factory overhead incurred is as follows:

Line Item Description Amount

Indirect labor $$400,400$

Subassembly Department $198,800$

Final Assembly Department $114,800$

Total $$714,000$

The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:

Activity Budgeted

Activity Cost Activity Base

Setup $$138,600$ Number of setups

Quality control $261,800$ Number of inspections

Total $$400,400$

The activity$-$base usage quantities and units produced for the two products follow:

Line Item Description Number of

Setups Number of

Inspections Direct Labor

Hours$$Subassembly Direct Labor

Hours$$Final Assembly Units

Produced

Receivers $804508755257,000$

Loudspeakers $3201,7505258757,000$

Total $4002,2001,4001,40014,000$

Required:

$1.$ Determine a plantwide overhead rate based upon direct labor hours.

fill in the blank $1$ of $1$Direct labor overhead rate: $

$255$

per direct labor hour

$2.$ Determine the total and per$-$unit factory overhead costs allocated to each product, using the plantwide overhead rate in $(1).$ Round per unit amounts to the nearest whole cent.

Product Total Factory Overhead Factory Overhead Per Unit

Receivers $fill in the blank $2$

$357,000$

$fill in the blank $3$

$51$

Loudspeakers $fill in the blank $4$

$357,000$

$fill in the blank $5$

$51$

$3.$ Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is $$420,000$ and $$294,000$ for the Subassembly and Final Assembly departments, respectively.

Department Production Department Rate

Subassembly Department $fill in the blank $6$

$300$

per direct labor hour

Final Assembly Department $fill in the blank $7$

$210$

per direct labor hour

$4.$ Determine the total and per$-$unit factory overhead costs allocated to each product, using the multiple production department overhead rates in $(3).$ Round per unit amounts to the nearest whole cent.

Product Total Factory Overhead Factory Overhead Per Unit

Receivers $fill in the blank $8$

$372,750$

$fill in the blank $9$

$53\mathrm{.}25$

Loudspeakers $fill in the blank $10$

$341,250$

$fill in the blank $11$

$48\mathrm{.}75$

$5.$ Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Round per unit amounts to the nearest whole cent.

Activity Activity Rate

Setup $fill in the blank $12$

$346\mathrm{.}5$

per setup

Quality Control $fill in the blank $13$

$119$

per inspection

Subassembly Department $fill in the blank $14$

$142$

per direct labor hour

Final Assembly Department $fill in the blank $15$

$82$

per direct labor hour

$6.$ Determine the total and per$-$unit cost assigned to each product under activity$-$based costing. Round the per unit amounts to the nearest whole cent.

Product Total Activity Cost Activity Cost Per Unit

Receivers $fill in the blank $16$

$248,570$

$fill in the blank $17$

$35\mathrm{.}51$

Loudspeakers $fill in the blank $18$

$465,430$

$fill in the blank $19$

$66\mathrm{.}49$

$7.$ Comment on the differences in the per$-$unit overhead allocated to each product using the single plantwide factory overhead rate method, the multiple production department factory overhead rate method, and activity$-$based costing.

The plantwide overhead method allocates fill in the blank $1$ of $12$$

of overhead to each product, while the multiple production department method allocates fill in the blank $2$ of $12$$

overhead to receivers and fill in the blank $3$ of $12$$

to loudspeakers. Both the plantwide and multiple production department overhead methods fill in the blank $4$ of $12$

do

distort the allocation of overhead because they fill in the blank $5$ of $12$

adequately

account for how each product consumes overhead. In contrast, activity based costing allocates fill in the blank $6$ of $12$$

of factory overhead to receivers and fill in the blank $7$ of $12$$

to loudspeakers. Activity$-$based costing fill in the blank $8$ of $12$

less

accurately allocates factory overhead because fill in the blank $9$ of $12$

it better accounts

for how each product consumes overhead. Loudspeakers have fill in the blank $10$ of $12$

more

setups than do receivers. In addition, loudspeakers require fill in the blank $11$ of $12$

less

quality control inspections than do receivers. As a result, loudspeakers have fill in the blank $12$ of $12$

higher

activity costs than receivers.