Question
Commonwealth Devices makes three wearable fitness devices at its Lake Plant: CFit-1, CFit-2, and CFit-Xtra. The company has for many years allocated overhead to products
Commonwealth Devices makes three wearable fitness devices at its Lake Plant: CFit-1, CFit-2, and CFit-Xtra. The company has for many years allocated overhead to products using machine-hours. Last year, the Lake Plant produced and shipped 8,000 units of CFit-1, 14,000 units of CFit-2, and 8,000 units of CFit-Xtra. The plant recorded the following revenues and costs:
COMMONWEALTH DEVICES | ||||
Lake Plant | ||||
Income Statement | ||||
CFit-1 | CFit-2 | CFit-Xtra | Total | |
---|---|---|---|---|
Sales revenue | $ 864,000 | $ 1,260,000 | $ 1,296,000 | $ 3,420,000 |
Direct costs | ||||
Direct materials | 192,000 | 280,000 | 240,000 | 712,000 |
Direct labor | 40,000 | 52,500 | 120,000 | 212,500 |
Variable overhead | ||||
Machine setup | 192,000 | |||
Order processing | 144,000 | |||
Materials handling | 192,000 | |||
Machining | 96,000 | |||
Shipping | 72,000 | |||
Contribution margin | $ 1,799,500 | |||
Plant administration costs | 1,400,000 | |||
Gross profit | $ 399,000 |
The Lake Plant has put together an employee team to recommend a possible activity-based cost system, including cost allocation bases. The employee team recommends the following:
Activity | Cost Driver | CFit-1 | CFit-2 | CFit-Xtra |
---|---|---|---|---|
Machine setup | Setups | 80 | 160 | 160 |
Order processing | Orders received | 9 | 20 | 11 |
Materials handling | Material movements | 3,000 | 4,500 | 5,000 |
Machining | Machine-hours | 10,000 | 16,000 | 24,000 |
Shipping | Units shipped | 8,000 | 14,000 | 8,000 |
The employee team further recommends that administration costs not be allocated to products.
Required:
a. Using machine-hours to allocate overhead, complete the income statement for the Lake Plant. Do not allocate administrative costs to products.
b-1. Compute the cost driver rates.
b-2. Complete the income statement using the activity-based costing method suggested by the employee team.
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