Plantwide versus Departmental Rates, Product$-$Costing Accuracy: Activity$-$Based Costing

Ramsey Company produces speakers $($Model A and Model B$).$ Both products pass through two producing departments. Model A$\text{'}$s production is much more labor$-$intensive than that of Model B$.$ Model B is also the more popular of the two speakers. The following data has been gathered for the two products:

Line Item Description Product Data

Model A Product Data

Model B

Units produced per year $10,000100,000$

Prime costs $$150,000$ $$1,500,000$

Direct labor hours $140,000300,000$

Machine hours $20,000200,000$

Production runs $4060$

Inspection hours $8001,200$

Maintenance hours $10,00090,000$

Overhead costs:

Line Item Description Amount

Setup costs $$270,000$

Inspection costs $210,000$

Machining $240,000$

Maintenance $270,000$

Total $$990,000$

Required:

Download Excel spreadsheet

Question Content Area

$1.$ Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. $($Round to two decimal places.$)$

Plantwide rate: fill in the blank $1$ of $1$$

per DLH$.$

Model A: fill in the blank $1$ of $1$$

overhead cost per unit.

Model B: fill in the blank $1$ of $1$$

overhead cost per unit.

Question Content Area

$2.$ Compute the overhead cost per unit for each product by using ABC. $($Round rates and unit overhead costs to two decimal places.$)$

Model Answer

Model A: fill in the blank $1$ of $2$$

overhead cost per unit.

Model B: fill in the blank $2$ of $2$$

overhead cost per unit.

Note: Be sure to complete both tables below.

Activity Driver Activity Rate

Setups

fill in the blank $1$ of $4$$

per

Inspections

fill in the blank $2$ of $4$$

per

Machining

fill in the blank $3$ of $4$$

per

Maintenance

fill in the blank $4$ of $4$$

per

Overhead assignment

Line Item Description Model A Model B

Setups fill in the blank $1$ of $14$$

fill in the blank $2$ of $14$$

Inspections fill in the blank $3$ of $14$

fill in the blank $4$ of $14$

Machining fill in the blank $5$ of $14$

fill in the blank $6$ of $14$

Maintenance fill in the blank $7$ of $14$

fill in the blank $8$ of $14$

Total overhead fill in the blank $9$ of $14$$

fill in the blank $10$ of $14$$

$-$: Units produced fill in the blank $11$ of $14$

fill in the blank $12$ of $14$

Overhead per unit fill in the blank $13$ of $14$$

fill in the blank $14$ of $14$$

Question Content Area

$3.$ Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department $1$: $($machine intensive$)$ with a rate of $$3\mathrm{.}50$ per machine hour and Department $2$: $($labor intensive$)$ with a rate of $$0\mathrm{.}90$ per direct labor hour. The consumption of these two drivers is as follows:

Line Item Description Department $1$

Machine Hours Department $2$

Direct Labor Hours

Model A $10,000130,000$

Model B $170,000270,000$

Compute the overhead cost per unit for each product by using departmental rates. $($Round to two decimal places.$)$

Model A: fill in the blank $1$ of $2$$

per unit

Model B: fill in the blank $2$ of $2$$

per unit

Question Content Area

$4.$ Conceptual Connection: Using the activity$-$based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?

A common justification is to use fill in the blank $1$ of $7$

hours for machine$-$intensive departments and fill in the blank $2$ of $7$

hours for labor$-$intensive departments. Using activity$-$based costs as the standard, we can say the department rates fill in the blank $3$ of $7$

the accuracy of the overhead cost assignment for both products and were less accurate than the plantwide rates. The departmental rates cost A well fill in the blank $4$ of $7$

the ABC method while the plantwide rate costs Product A well fill in the blank $5$ of $7$

the ABC method. The departmental rates are not dramatically more wrong then the plantwide rate; however, they are wrong in a fill in the blank $6$ of $7$

direction. The departmental rates fill in the blank $7$ of $7$

do better than the plantwide rates.