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'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:

	Product Data
	Model A	Model B
Units produced per year	10,000	100,000
Prime costs	$149,000	$1,490,000
Direct labor hours	143,000	280,000
Machine hours	21,000	201,000
Production runs	50	60
Inspection hours	600	1,200
Maintenance hours	12,000	88,000
Overhead costs:
Setup costs	$275,000
Inspection costs	198,000
Machining	496,000
Maintenance	300,000
Total	$1,269,000

Required:

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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 bc30aaff5024051_1 per DLH.

Model A:	$fill in the blank bc30aaff5024051_2 overhead cost per unit
Model B:	$fill in the blank bc30aaff5024051_3 overhead cost per unit

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

Model A:	$fill in the blank dbb90e028f8906e_1 overhead cost per unit
Model B:	$fill in the blank dbb90e028f8906e_2 overhead cost per unit

Note: Be sure to complete both tables below.

Activity	Driver	Activity Rate
Setups	Production runsInspection hoursMachine hoursMaintenance hours	$fill in the blank dbb90e028f8906e_4 per runhour
Inspections	Production runsInspection hoursMachine hoursMaintenance hours	$fill in the blank dbb90e028f8906e_7 per runhour
Machining	Production runsInspection hoursMachine hoursMaintenance hours	$fill in the blank dbb90e028f8906e_10 per runhour
Maintenance	Production runsInspection hoursMachine hoursMaintenance hours	$fill in the blank dbb90e028f8906e_13 per runhour

Overhead assignment
	Model A	Model B
Setups	$fill in the blank dbb90e028f8906e_15	$fill in the blank dbb90e028f8906e_16
Inspections	fill in the blank dbb90e028f8906e_17	fill in the blank dbb90e028f8906e_18
Machining	fill in the blank dbb90e028f8906e_19	fill in the blank dbb90e028f8906e_20
Maintenance	fill in the blank dbb90e028f8906e_21	fill in the blank dbb90e028f8906e_22
Total overhead	$fill in the blank dbb90e028f8906e_23	$fill in the blank dbb90e028f8906e_24
Units produced	fill in the blank dbb90e028f8906e_25	fill in the blank dbb90e028f8906e_26
Overhead per unit	$fill in the blank dbb90e028f8906e_27	$fill in the blank dbb90e028f8906e_28

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

	Department 1 Machine Hours	Department 2 Direct Labor Hours
Model A	9,000	135,000
Model B	150,000	250,000

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

Model A:	$fill in the blank a5ec60fcaffbf80_1 per unit
Model B:	$fill in the blank a5ec60fcaffbf80_2 per unit

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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

machinelabor

hours for machine-intensive departments and

machinelabor

hours for labor-intensive departments. Using activity-based costs as the standard, we can say that departmental rates

increaseddecreased

the accuracy of the overhead cost assignment for both products. The departmental rates cost A well

abovebelow

the ABC method while the plantwide rate costs A well

abovebelow

the ABC method. However, the rates of difference are very close. Looking at it this way, department costs are not clearly more wrong than the plantwide rate; they are wrong in a

differentsame

direction. The departmental rates

diddid not

do better than the plantwide rates.

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