Product-Costing Accuracy, Consumption Ratios

Plata Company produces two products: a mostly handcrafted soft leather briefcase sold under the label Maletin Elegant and a leather briefcase produced largely through automation and sold under the label Maletin Fina. The two products use two overhead activities, with the following costs:

Setting up equipment	$3,000
Machining	18,000

The controller has collected the expected annual prime costs for each briefcase, the machine hours, the setup hours, and the expected production.

	Elegant	Fina
Direct labor	$9,000	$3,000
Direct materials	$3,000	$3,000
Units	3,000	3,000
Machine hours	500	4,500
Setup hours	100	100

Required:

1. Conceptual Connection: Do you think that the direct labor costs and direct materials costs are accurately traced to each briefcase? Explain.

Yes. Because direct materials and direct labor are directly traceable to each product, their cost assignment should be accurate.

Partly correct. The direct material is directly traceable to each product but direct labor is not traceable to each product.

Partly correct. The direct labor is directly traceable to each product but direct material in not traceable to each product.

No. The direct material and direct labor is not traceable to each product.

2. Calculate the consumption ratios for each activity. Round to two decimal places.

	Elegant	Fina
Machining
Setups

3a. Calculate the overhead cost per unit for each briefcase by using a plantwide rate based on direct labor costs. Round rates to the nearest cent.

Line Item Description	Overhead cost
Elegant
Fina

3b. Based on your calculations above which of the following statements is correct?

More machine and setup costs are assigned to Elegant than Fina.

More machine and setup costs are assigned to Fina than Elegant.

Fina uses more setup hours than Elegant.

Fina and Elegant use equal number of machine hours.

4. Conceptual Connection: Calculate the overhead cost per unit for each briefcase by using overhead rates based on machine hours and setup hours. Round your answers to the nearest cent.

	Overhead cost
Elegant
Fina