Problem E: Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashions. Sunshield presently allocates overhead to products using a rate based on direct labor-hours. A consultar recommended that Sunshield switch to activity-based costing, Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity cente Use this information to compute the overhead rates for each cost driver. Costs runs orders Recommended Cost Driver Production runs Orders Pounds of materials used Machine hours Inspections Units shipped Activity Production setup Order processing Materials handling Equipment depreciation & Maintenance Quality management Packing & shipping Total Overhead Ibs. $ $ $ $ $ $ $ Estimated Cost Driver Units 100 200 8000 10000 40 20000 30,000 50,000 20,000 60,000 50,000 40,000 250,000 machine hours inspections units In addition, there are 2,500 direct labor-hours in a typical year and direct labor costs are $15 per hour. Assume the following activities occurred in February: Nerds Stars Fashions $ 500 2,500 $ 100 8 400 2,000 89 4 Units produced Direct materials costs Direct labor hours Orders Production runs Pounds of materials Machine hours Inspections Units Shipped 1,000 4,000 $ 100 8 2 400 500 2 1,000 4 200 300 8 200 300 2 300 2 500 Problem E Problem E (a) Compute overhead allocation rates (1) for each of the cost drivers recommended by the consultant and (2) for direct labor. Activity Production setup Order processing Materials handling Equip deprec & maint Quality mangement Packing and shipping Estimated Costs 30,000 50,000 20,000 60,000 50,000 40,000 Estimated cost driver 100 runs 200 orders 8,000 lbs. 10,000 machine hrs 40 inspections 20,000 units Activity Rate (predetermined overhead rate) 300.00 per run 250.00 per order 2.50 per pound (lb) 6.00 per machine hour 1,250.00 per inspection S 2.00 per unit $ $ $ Direct labor $ 250,000 DL hours per direct labor hour (use total overhead for direct labor) (b) Management wants to compare the product costs using ABC and the traditional method for the month of February. Compute the production costs for each product for February using direct labor- hours as the allocation base. (Note: Production costs are direct materials, direct labor, and applied overhead.) (Show calculations in the row below when needed) Totals $ 8,500 (this a formula entered for you) Nerds 4,000 $ (given in problem) 1,500 (77 DL hour x $77 per hour) 10,000 (77 DL hours x $?? per hour) 15,500 $ Direct materials (given in problem) Direct labor (DL hours x DL cost of $15 per hour) Overhead applied (DL hours x POHR calculated above for direct labor) TOTAL COST Stars 2,500 $ (given in problem) 1,500 (??DL hour x $?? per hour) 10,000 (??DL hours x $?? per hour) 14,000 $ Fashions 2,000 $ Igiven in problem) 1,335 (?? DL hours x $??) 8,900 (?? Dlhrx $?? per hr) 12,235$ 4,335 (this a formula entered for you) 28,900 (this a formula entered for you) 41,735 (this a formula entered for you) (c) To derive product costs under Activity Based Costing, compute the production costs for each product for February using the cost drivers recommended by the consultant. Note: To apply overhead, take the actual units of the cost driver x that activity rate for each product. (Show calculations in the row below) (c) To derive product costs under Activity Based Costing, compute the production costs for each product for February using the cost drivers recommended by the consultant. Note: To apply overhead, take the actual units of the cost driver x that activity rate for each product. (Show calculations in the row below) Nerds Stars Fashions $ 4,000 $ 1,500 2,500 $ 1,500 2,000 $ 1,335 Totals 8,500 (this a formula entered for you) 4,335 (this a formula entered for you) 4,200 (this a formula entered for you) Direct materials (Same as in Part b above) Direct labor (Same as in Part b above) Overhead applied: Production setup (actual runs x activity rate for production setup) Order processing (actual orders x activity rate for order processing) Materials handling 5,000 (this a formula entered for you) 2,000 (this a formula entered for you) Equip deprec & maint 600 1,200 2,400 (?? runs x $?? per run) (?? runs x $?? per run) 10 2,000 2,000 1,000 (77 orders x $ 77 per order) (?? orders x $ ?? per order) (?? orders x $ ?? per order) 1,000 500 500 (?? lb. $?? per Ib.) (?? lb. x $??perib) (?? lb. x $??peribu) 3,000 1,800 1,800 (?? mach hrs x $?? per MH) (?? mach hrs x $?? per MH) (?? mach hrs x ?? per MH) 2,500 2,500 2,500 (77 inspections x $7? per insp.) (7? inspections x $?? per insp.) (?? inspections x $?? per insp.) 2,000 1,000 600 (?? units X $77 per unit) (?? units X $?? per unit) (?? units X $?? per unit) 16,600S 13,000 $ 12,135 | $ 6,600 (this a formula entered for you) Quality mangement 7,500 (this a formula entered for you) Packing and shipping 3,600 (this a formula entered for you) TOTAL COST 41,735 (this a formula entered for you! (d) Management has seen your numbers and wants to know how you account for the discrepancy, between the product costs using direct labore hours as the allocation base to apply overhead versus using activity based costing to apply overhead. Write a brief response to management with your explanation. Problem E: Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashions. Sunshield presently allocates overhead to products using a rate based on direct labor-hours. A consultar recommended that Sunshield switch to activity-based costing, Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity cente Use this information to compute the overhead rates for each cost driver. Costs runs orders Recommended Cost Driver Production runs Orders Pounds of materials used Machine hours Inspections Units shipped Activity Production setup Order processing Materials handling Equipment depreciation & Maintenance Quality management Packing & shipping Total Overhead Ibs. $ $ $ $ $ $ $ Estimated Cost Driver Units 100 200 8000 10000 40 20000 30,000 50,000 20,000 60,000 50,000 40,000 250,000 machine hours inspections units In addition, there are 2,500 direct labor-hours in a typical year and direct labor costs are $15 per hour. Assume the following activities occurred in February: Nerds Stars Fashions $ 500 2,500 $ 100 8 400 2,000 89 4 Units produced Direct materials costs Direct labor hours Orders Production runs Pounds of materials Machine hours Inspections Units Shipped 1,000 4,000 $ 100 8 2 400 500 2 1,000 4 200 300 8 200 300 2 300 2 500 Problem E Problem E (a) Compute overhead allocation rates (1) for each of the cost drivers recommended by the consultant and (2) for direct labor. Activity Production setup Order processing Materials handling Equip deprec & maint Quality mangement Packing and shipping Estimated Costs 30,000 50,000 20,000 60,000 50,000 40,000 Estimated cost driver 100 runs 200 orders 8,000 lbs. 10,000 machine hrs 40 inspections 20,000 units Activity Rate (predetermined overhead rate) 300.00 per run 250.00 per order 2.50 per pound (lb) 6.00 per machine hour 1,250.00 per inspection S 2.00 per unit $ $ $ Direct labor $ 250,000 DL hours per direct labor hour (use total overhead for direct labor) (b) Management wants to compare the product costs using ABC and the traditional method for the month of February. Compute the production costs for each product for February using direct labor- hours as the allocation base. (Note: Production costs are direct materials, direct labor, and applied overhead.) (Show calculations in the row below when needed) Totals $ 8,500 (this a formula entered for you) Nerds 4,000 $ (given in problem) 1,500 (77 DL hour x $77 per hour) 10,000 (77 DL hours x $?? per hour) 15,500 $ Direct materials (given in problem) Direct labor (DL hours x DL cost of $15 per hour) Overhead applied (DL hours x POHR calculated above for direct labor) TOTAL COST Stars 2,500 $ (given in problem) 1,500 (??DL hour x $?? per hour) 10,000 (??DL hours x $?? per hour) 14,000 $ Fashions 2,000 $ Igiven in problem) 1,335 (?? DL hours x $??) 8,900 (?? Dlhrx $?? per hr) 12,235$ 4,335 (this a formula entered for you) 28,900 (this a formula entered for you) 41,735 (this a formula entered for you) (c) To derive product costs under Activity Based Costing, compute the production costs for each product for February using the cost drivers recommended by the consultant. Note: To apply overhead, take the actual units of the cost driver x that activity rate for each product. (Show calculations in the row below) (c) To derive product costs under Activity Based Costing, compute the production costs for each product for February using the cost drivers recommended by the consultant. Note: To apply overhead, take the actual units of the cost driver x that activity rate for each product. (Show calculations in the row below) Nerds Stars Fashions $ 4,000 $ 1,500 2,500 $ 1,500 2,000 $ 1,335 Totals 8,500 (this a formula entered for you) 4,335 (this a formula entered for you) 4,200 (this a formula entered for you) Direct materials (Same as in Part b above) Direct labor (Same as in Part b above) Overhead applied: Production setup (actual runs x activity rate for production setup) Order processing (actual orders x activity rate for order processing) Materials handling 5,000 (this a formula entered for you) 2,000 (this a formula entered for you) Equip deprec & maint 600 1,200 2,400 (?? runs x $?? per run) (?? runs x $?? per run) 10 2,000 2,000 1,000 (77 orders x $ 77 per order) (?? orders x $ ?? per order) (?? orders x $ ?? per order) 1,000 500 500 (?? lb. $?? per Ib.) (?? lb. x $??perib) (?? lb. x $??peribu) 3,000 1,800 1,800 (?? mach hrs x $?? per MH) (?? mach hrs x $?? per MH) (?? mach hrs x ?? per MH) 2,500 2,500 2,500 (77 inspections x $7? per insp.) (7? inspections x $?? per insp.) (?? inspections x $?? per insp.) 2,000 1,000 600 (?? units X $77 per unit) (?? units X $?? per unit) (?? units X $?? per unit) 16,600S 13,000 $ 12,135 | $ 6,600 (this a formula entered for you) Quality mangement 7,500 (this a formula entered for you) Packing and shipping 3,600 (this a formula entered for you) TOTAL COST 41,735 (this a formula entered for you! (d) Management has seen your numbers and wants to know how you account for the discrepancy, between the product costs using direct labore hours as the allocation base to apply overhead versus using activity based costing to apply overhead. Write a brief response to management with your explanation