EXERCISE 2A-1 Activity-Based Absorption Costing LO2-5 Fogerty Company makes two products-Hubs and Sprockets. Data regarding the two products follow: Direct Labor-Hours Annual per Unit Production Hubs 0.80 10,000 units Sprockets ... 0.40 40,000 units Additional information about the company follows: a. Hubs require $32 in direct materials per unit, and Sprockets require $18. b. The direct labor wage rate is $15 per hour. c. Hubs are more complex to manufacture than Sprockets and they require special processing. d. The company's activity-based absorption costing system has the following activity cost pools: Expected Activity Estimated Activity Cost Pool (and Activity Measure) Overhead Cost Hubs Sprockets Total Machine setups (number of setups) $72,000 Special processing (machine-hours) ...... 100 300 400 General factory (Direct labor-hours) $200,000 5,000 0 5,000 . . . . . . $816,000 8,000 16,000 24,000 Required: 1. Compute the activity rate for each activity cost pool. 2. Compute the unit product cost for Hubs and Sprockets using activity-based absorption costing2-7 Explain why some production costs must be assigned to products through an allocation process. 2-8 Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs? 2-9 What factors should be considered in selecting an allocation base to be used in computing a predetermined overhead rate? 2-10 If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period? 2-11 Would you expect the amount of applied overhead for a period to equal the actual overhead costs of the period? Why or why not? 2-12 What is underapplied overhead? Overapplied overhead?EXERCISE 2B-1 Overhead Rate Based on Capacity LO2-6 Wixis Cabinets makes custom wooden cabinets for high-end stereo systems from specialty woods. The company uses a job-order costing system. The capacity of the plant is determined by the capacity of its constraint, which is time on the automated bandsaw that makes finely beveled cuts in wood according to the preprogrammed specifications of each cabinet. The bandsaw can operate up to 180 hours per month. The estimated total manufacturing overhead cost at capacity is $14,760 per month. The company bases its predetermined overhead rate on capacity, so its predetermined overhead rate is $82 per hour of bandsaw use. The results of a recent month's operations appear below: Sales . . $43,740 Beginning inventories $0 Ending inventories . .. $0 Direct materials . . $5,350 Direct labor .... $8,860 Manufacturing overhead incurred $14,760 Selling and administrative expense $8, 180 Actual hours of bandsaw use . ... 150 Required: 1. Prepare an income statement following the example in Exhibit 2B-1 that records the cost of unused capacity on the income statement as a period expense. 2. Why do unused capacity costs arise when the predetermined overhead rate is based on capacity
