Comprehensive Practice Lands End Luggage factory manufactures two types of bags-Polyester bags and Leather bags. They have noticed that their leather bags have been much more profitable than the polyester bags and they want to make sure that they are handling the accounting correctly. They are not using activity-based costing - they are still using conventional cost accounting. Polyester Bage Leather Bags Per Unit of Direct Material Cost $30.00 $90.00 Per Unit of Direct Labor Cost 525.60 $28.00 Annual Sales Volume in units 7,000 3.000 Direct Labor Hours Per Unit 10 2.00 Total Factory Overhead is $874,200 and it is allocated based on direct labor hours. Part 1: Determine Unit Cost using Conventional Cost Accounting There is one overhead cost pool and direct labor hours are the cost driver. How many direct labor hours were used? Solve each of the following - make sure you show all your work: Polyester Leather Total Calculate the OH Application Rate: Solve the following - make sure you show all your work Total Overhead Costs Total DLH Calculate unit cost: Please fill in all the blanks below using the information from above: Polyester Leather Direct Materials Direct Labor Overhead - Polyester Overhead - Leather Total Unit cost These are the costs that the company is using to make business decisions. Chapter 5 Lecture - Page 8 Part 2: Using Activity Based Costing Now let's try it with Activity Based Costing. The company completed steps one and two and came up with 4 overhead cost pools and 4 cost drivers. Expected Activity Activity Activity Allocation Base Estimated Cost Pool (Cost Driver) Cost Polyester Leather Total General Factory Machine Hours $460,000 20,000 60,000 30,000 Engineering Costs Machine Setups $190,000 1,500 3,500 5,000 Quality Control Inspections $152,000 200 600 800 Purchasing Dept Purchase Orders $S2,200 500 500 1,000 $874,200 Note that total overhead is still $874,200. We have divided it into four cost pools. Calculate activity.cost allocation rates: Please fill in all the blanks below using the information from above: Activity Pool Cost Cost Driver Activity Rate General Factory $480,000 80,000 $6.00 per machine hour Engineering Costs $190,000 5,000 $38.00 per setup Quality Control $152,000 800 $190.00 per inspection Purchasing Dept $52,000 1,000 $52.00 per order Allocate Overhead - assuming actual = expected. Please fill in all the blanks below using the information from above: Polyester Leather Activity Expected Allocated Expected Allocated Activity Pool Rate Activity Cost Activity Cost General Factory Engineering Costs Quality Control Purchasing Dept Total Overhead /# of units Overhead cost per unit Chapter 5 Lecture - Page 9 Calculate Unit Cost: Please fill in all the blanks below using the information from previous page: Polyester Leather Direct Materials Direct Labor Overhead - Polyester Overhead - Leather Total Unit cost Now compare this to your unit costs from page 7 with one cost pool. Please fill in all the blanks below: Polyester Leather Total unit Cost using one cost pool Total Unit Cost using ABC Which number is more accurate? Why? Answer-make sure you explain your answer thoroughly: What mistakes have they been making in selling the polyester bags? Answer-make sure you explain your answer thoroughly: What mistakes have they been making in selling the leather bags? Answer-make sure you explain your answer thoroughly: Chapter 5 Lecture - Page 10
