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	$150,000	$1,500,000
Direct labor hours	140,000	300,000
Machine hours	19,000	196,000
Production runs	30	50
Inspection hours	600	1,300
Maintenance hours	10,000	90,000
Overhead costs:
Setup costs	$200,000
Inspection costs	199,500
Machining	180,500
Maintenance	300,000
Total	$880,000

Required:

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 f5e14afed03bfd7_1 per DLH.

Model A:	$fill in the blank f5e14afed03bfd7_2 overhead cost per unit
Model B:	$fill in the blank f5e14afed03bfd7_3 overhead cost per unit

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 c44ce9fea05106f_1 overhead cost per unit
Model B:	$fill in the blank c44ce9fea05106f_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 c44ce9fea05106f_4 per runhour
Inspections	Production runsInspection hoursMachine hoursMaintenance hours	$fill in the blank c44ce9fea05106f_7 per runhour
Machining	Production runsInspection hoursMachine hoursMaintenance hours	$fill in the blank c44ce9fea05106f_10 per runhour
Maintenance	Production runsInspection hoursMachine hoursMaintenance hours	$fill in the blank c44ce9fea05106f_13 per runhour

Overhead assignment
	Model A	Model B
Setups	$fill in the blank c44ce9fea05106f_15	$fill in the blank c44ce9fea05106f_16
Inspections	fill in the blank c44ce9fea05106f_17	fill in the blank c44ce9fea05106f_18
Machining	fill in the blank c44ce9fea05106f_19	fill in the blank c44ce9fea05106f_20
Maintenance	fill in the blank c44ce9fea05106f_21	fill in the blank c44ce9fea05106f_22
Total overhead	$fill in the blank c44ce9fea05106f_23	$fill in the blank c44ce9fea05106f_24
Units produced	fill in the blank c44ce9fea05106f_25	fill in the blank c44ce9fea05106f_26
Overhead per unit	$fill in the blank c44ce9fea05106f_27	$fill in the blank c44ce9fea05106f_28

3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1: (machine intensive) with a rate of $4 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	11,000	130,000
Model B	180,000	290,000

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

Model A:	$fill in the blank 4105f8077071f8c_1 per unit
Model B:	$fill in the blank 4105f8077071f8c_2 per unit

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.