Question 3: Activity Based Costing Very Untrusty Computer Limited manufactures only three (3) products: Shorts Shirts and Wigs. The company presently uses a plantwide pre-determined overhead approach (based on direct labour hours) to allocated overhead. The company is thinking of shifting to an activity-based costing system with the four main cost drivers of activity noted in the table below. Any additional overhead costs will be allocated using a plant-wide overhead rate based on direct machine hours. The company estimates that during 2024 it (the company) will produce 595,000 shorts, 360,000 shirts and 250,000 wigs. To produce each pair of shorts requires one (2) direct labour hour. To produce cach shirt requires two (2) direct labour hours. To produce each wig requires three (3) direct labour hours. The estimated direct material and direct labour costs for the three products for 2024 are as follows: Items Direct Material (per component) Direct Labour (per component Shorts SI 10 $240 Shirts S180 S280 Wigs $260 S120 The budgeted (estimated) total factory overhead data for 2024 is given as: Items Budgeted Overhead (5) Estimated Volume Level 470 Set-Ups Tool Set-Ups $19,480,000 Cloth Handling $8,570,000 28,000 metres Taping and Shipping S11,520,000 11,000 tape rolls Trips $15,250,000 6,900 trips Total Factory Overhead $71.970,000 Based on analysis of the consultants of the four overhead activities, it is estimated the production activities in 2024 will be as follows for the Shorts and Shirts with balance to Sunglasses: Activity Tool Set-Ups Shorts 105 Set-Ups Shirts 86 Set-Ups Cloth Handling 7.000 metres 12.000 metres Taping and Shipping 3,000 tape rolls 4,500 tape rolls Trips 2.850 trips 1.425 trips Required: (1) Compute the cost per unit for the three products using traditional absorption costing, (2) Compute the cost per unit for the three products using an activity-based costing method. [5 Marks) Question 3: Activity Based Costing Very Untrusty Computer Limited manufactures only three (3) products: Shorts Shirts and Wigs. The company presently uses a plantwide pre-determined overhead approach (based on direct labour hours) to allocated overhead. The company is thinking of shifting to an activity-based costing system with the four main cost drivers of activity noted in the table below. Any additional overhead costs will be allocated using a plant-wide overhead rate based on direct machine hours. The company estimates that during 2024 it (the company) will produce 595,000 shorts, 360,000 shirts and 250,000 wigs. To produce each pair of shorts requires one (2) direct labour hour. To produce cach shirt requires two (2) direct labour hours. To produce each wig requires three (3) direct labour hours. The estimated direct material and direct labour costs for the three products for 2024 are as follows: Items Direct Material (per component) Direct Labour (per component Shorts SI 10 $240 Shirts S180 S280 Wigs $260 S120 The budgeted (estimated) total factory overhead data for 2024 is given as: Items Budgeted Overhead (5) Estimated Volume Level 470 Set-Ups Tool Set-Ups $19,480,000 Cloth Handling $8,570,000 28,000 metres Taping and Shipping S11,520,000 11,000 tape rolls Trips $15,250,000 6,900 trips Total Factory Overhead $71.970,000 Based on analysis of the consultants of the four overhead activities, it is estimated the production activities in 2024 will be as follows for the Shorts and Shirts with balance to Sunglasses: Activity Tool Set-Ups Shorts 105 Set-Ups Shirts 86 Set-Ups Cloth Handling 7.000 metres 12.000 metres Taping and Shipping 3,000 tape rolls 4,500 tape rolls Trips 2.850 trips 1.425 trips Required: (1) Compute the cost per unit for the three products using traditional absorption costing, (2) Compute the cost per unit for the three products using an activity-based costing method. [5 Marks)
