Question Content Area

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$\text{'}$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 $10,000100,000$

Prime costs $$146,000$ $$1,460,000$

Direct labor hours $144,000280,000$

Machine hours $23,000199,000$

Production runs $5060$

Inspection hours $6001,000$

Maintenance hours $11,00089,000$

Overhead costs:

Setup costs $$297,000$

Inspection costs $168,000$

Machining $507,000$

Maintenance $300,000$

Total $$1,272,000$

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 $23783901901$b$026\_1$

per DLH$.$

Model A: $fill in the blank $23783901901$b$026\_2$

overhead cost per unit

Model B: $fill in the blank $23783901901$b$026\_3$

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 $68$a$88705505$afd$8\_1$

overhead cost per unit

Model B: $fill in the blank $68$a$88705505$afd$8\_2$

overhead cost per unit

Note: Be sure to complete both tables below.

Activity Driver Activity Rate

Setups

$fill in the blank $68$a$88705505$afd$8\_4$

per

Inspections

$fill in the blank $68$a$88705505$afd$8\_7$

per

Machining

$fill in the blank $68$a$88705505$afd$8\_10$

per

Maintenance

$fill in the blank $68$a$88705505$afd$8\_13$

per

Overhead assignment

Model A Model B

Setups $fill in the blank $68$a$88705505$afd$8\_15$

$fill in the blank $68$a$88705505$afd$8\_16$

Inspections fill in the blank $68$a$88705505$afd$8\_17$

fill in the blank $68$a$88705505$afd$8\_18$

Machining fill in the blank $68$a$88705505$afd$8\_19$

fill in the blank $68$a$88705505$afd$8\_20$

Maintenance fill in the blank $68$a$88705505$afd$8\_21$

fill in the blank $68$a$88705505$afd$8\_22$

Total overhead $fill in the blank $68$a$88705505$afd$8\_23$

$fill in the blank $68$a$88705505$afd$8\_24$

$-$: Units produced fill in the blank $68$a$88705505$afd$8\_25$

fill in the blank $68$a$88705505$afd$8\_26$

Overhead per unit $fill in the blank $68$a$88705505$afd$8\_27$

$fill in the blank $68$a$88705505$afd$8\_28$

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 $9,000130,000$

Model B $150,000290,000$

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

Model A: $fill in the blank dffed$3014$fc$804$a$\_1$

per unit

Model B: $fill in the blank dffed$3014$fc$804$a$\_2$

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

hours for machine$-$intensive departments and

hours for labor$-$intensive departments. Using activity$-$based costs as the standard, we can say that departmental rates

the accuracy of the overhead cost assignment for both products. The departmental rates cost A well

the ABC method while the plantwide rate costs A well

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

direction. The departmental rates

do better than the plantwide rates.