Question
Herbert Ltd manufactures parts for battery electric vehicles. The details of the two parts and relevant information are given below for one period: Product parts
Herbert Ltd manufactures parts for battery electric vehicles. The details of the two parts and relevant information are given below for one period:
Product parts | Part X | Part Y |
Output in units: | 7,200 | 10,500 |
Cost per unit: | ||
Direct material | $35 | $45 |
Direct labour | $25 | $20 |
Total machine hours | 1,200 | 2,800 |
Number of production runs | 24 | 35 |
Orders executed | 120 | 140 |
Number of shipments | 35 | 40 |
The data for activity centre, budgeted overhead cost and cost driver are as follows:
Activity centre | Budgeted overhead cost $ | Cost driver |
Machining | 180,000 | Machine hours |
Set-up | 59,000 | Number of production runs |
Inspection/Quality control | 29,500 | Number of production runs |
Material handling | 78,000 | Orders executed |
Delivery | 15,000 | Number of shipments |
Total overhead costs | $361,500 |
Required:
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a) Calculate the overhead rate based on traditional overhead allocation rate with output in units as the base. Determine the total cost to produce one unit of Part X and one unit of Part Y.
(4 marks)
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b) Calculate the overhead rate for each activity centre based on activity-based costing techniques. Determine the total cost to produce one unit of Part X and one unit of Part Y.
(9 marks)
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c) Using the data available, explain the differences between the unit overhead costs between a) and b) above.
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