Practice Problem Hewlett-Packard makes two flat panel monitors that are available in both a deluxe and a regular model. The deluxe model was just introduced to tap a new segment of the market. Since Introduction of the deluxe model, the company's profits have steadily declined. Sales of the deluxe model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $2,000,000 in overhead costs would be incurred and the company would produce and sell 5,000 units of the deluxe model and 40.000 units of the regular model. The deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires 0.8 hours. Materials and labor costs per unit are given below: Please fill in all the blanks below: $16 Deluxe Regular Per Unit of Direct Material Cost $150 $112 Per Unit of Direct Labor Cost $8 Annual Sales Volume Direct Labor Hours Per Unit Part 1: Determine Unit Cost using Conventional Cost Accounting There is one overhead cost pool and direct labor hours are the driver. Answer everything below- make sure you show all your work How many direct labor hours were used? Deluxe Regular Total Calculate the OH Application Rate: Total Overhead Costs Total DLH Calculate unit cost: Answer everything below-make sure you show all your work Deluxe Regular Direct Materials Direct Labor Overhead - Deluxe Overhead - Regular Total Unit cost These are the costs that the company is using to make business decisions. Chapter 5 Lecture - Page 13 Part 2: Using Activity Based Costing Now let's try it with Activity Based Costing. The company did Steps 1 and 2 and came up with 4 overhead cost pools with and 4 cost drivers. Activity Allocation Base Estimated Expected Activity Activity Cost Pool (Cost Driver) Cost Deluxe Regular Total Purchase Orders Orders 584,000 400 800 1,200 Rework Requests Requests 216,000 600 900 Product Testing Tests 450,000 4,000 11,000 15,000 Machine Related Machine Hours 1,250,000 20,000 30,000 50,000 $2,000,000 300 Note that total overhead is still $2,000,000. We have divided it into four cost pools. Calculate the activity cost allocation rates: Please fill in all the blanks below: Cost Cost Driver Activity Rate Activity Pool Purchase Orders per order Rework Requests per request Product Testing per test Machine Related per machine hour Allocate Overhead: Please fill in all the blanks below: Activity Rate Deluxe Expected Allocated Activity Cost Activity Pool Purchase Orders Regular Expected Activity Allocated Cost Rework Requests Product Testing Machine Related Total Overhead /# of units Overhead cost per unit Chapter 5 Lecture - Page 14 Calculate Unit Cost: Please fill in all the blanks below: Deluxe Regular Direct Materials Direct Labor Overhead - Deluxe Overhead - Regular Total Unit cost Now compare this to your unit costs from page 12 with one cost pool. Deluxe Regular Total unit Cost using one cost pool Total Unit Cost using ABC Which number is more accurate? Answer - make sure you explain your answer thoroughly: What mistakes have they been making in selling Deluxe? Answer-make sure you explain your answer thoroughly: What mistakes have they been making in selling Regular? Answer-make sure you explain your answer thoroughly: Chapter 5 Lecture - Page 15
