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	$148,000	$1,480,000
Direct labor hours	138,000	310,000
Machine hours	17,000	205,000
Production runs	40	70
Inspection hours	700	1,400
Maintenance hours	8,000	92,000
Overhead costs:
Setup costs	$286,000
Inspection costs	220,500
Machining	537,500
Maintenance	300,000
Total	$1,344,000

Required:

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 db5012f6cff2f84_1 per DLH.

Model A:	$fill in the blank db5012f6cff2f84_2 overhead cost per unit
Model B:	$fill in the blank db5012f6cff2f84_3 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 A:	$fill in the blank 3a2d61fedfcd07b_1 overhead cost per unit
Model B:	$fill in the blank 3a2d61fedfcd07b_2 overhead cost per unit

Note: Be sure to complete both tables below.

Activity	Driver	Activity Rate
Setups	Production runsInspection hoursMachine hoursMaintenance hoursProduction runs	$fill in the blank 3a2d61fedfcd07b_4 per runhourrun
Inspections	Production runsInspection hoursMachine hoursMaintenance hoursInspection hours	$fill in the blank 3a2d61fedfcd07b_7 per runhourhour
Machining	Production runsInspection hoursMachine hoursMaintenance hoursMachine hours	$fill in the blank 3a2d61fedfcd07b_10 per runhourhour
Maintenance	Production runsInspection hoursMachine hoursMaintenance hoursMaintenance hours	$fill in the blank 3a2d61fedfcd07b_13 per runhourhour

Overhead assignment
	Model A	Model B
Setups	$fill in the blank 3a2d61fedfcd07b_15	$fill in the blank 3a2d61fedfcd07b_16
Inspections	fill in the blank 3a2d61fedfcd07b_17	fill in the blank 3a2d61fedfcd07b_18
Machining	fill in the blank 3a2d61fedfcd07b_19	fill in the blank 3a2d61fedfcd07b_20
Maintenance	fill in the blank 3a2d61fedfcd07b_21	fill in the blank 3a2d61fedfcd07b_22
Total overhead	$fill in the blank 3a2d61fedfcd07b_23	$fill in the blank 3a2d61fedfcd07b_24
Units produced	fill in the blank 3a2d61fedfcd07b_25	fill in the blank 3a2d61fedfcd07b_26
Overhead per unit	$fill in the blank 3a2d61fedfcd07b_27	$fill in the blank 3a2d61fedfcd07b_28

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 $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	129,000
Model B	160,000	280,000

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

Model A:	$fill in the blank 2501f1007055043_1 per unit
Model B:	$fill in the blank 2501f1007055043_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

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.