Question:

• I would like to know, is my answer for 1st question right? (Application of overhead)
• According to Table 3 & 4, Product X123 seems to use more of machine department compare to assembly department and whereas, Product R907 uses more of assembly department compare to machine department. Am I right? If not How to determine which product is labour or machine intensive (especially which Table)?
• For Question 3, I believe Activity based costing has a better cause-effect relations. It is possible to see improvement in the allocation of overheads, with minimal distortion. There is not enough information provided to definitely say ABC system is going to improve the overhead allocation. (Please advise further)

*PLEASE REFER TO MY SOLUTION*

Zest produces and supplies 2 types of component parts to industrial Equipment manufacturers . These parts are known as* 123 and R.907 . There are 2 departments in the factory : the machining and assembly departments. The machining department has highly automated operations , while assembly has labour - intensive operations . Table 1 : Annual production data by product Product* 123 Product R.907 Units produced 1. 000 2.00 0 Total died labour hours [OLH ) consumed per unit 5. DLH` 15 DLH Total machine hours ( MH ! consumed per unit 15 MH 5. MH The overhead cost incurred in the Machining department was $1, 300, 000 , while the overhead cost in the Assembly department was $350.000Table 2. Annual overhead costs and production activity by department Machining dept Assembly dept Total Overhead cost $1, 300,000 $350, 000 $1. 650, 000 Direct labour hours DLH / consumed perdept 5. DOD DLH 30, 000 DLH 35, 000 DLH Machine hours ( MH) consumed per dept 23, 000 MH 2,000 MH 25, 000 MTH The manager , Rex , decided to allocate costs to the 2 products in the following manner . he divided the total overhead costs of $1, 650. 000 by the total number of labour hours utilised in the factory fie ( 1000 * 5 ) plus ( 2000* * 15) = 35, 000 DLH ). Therefore his overhead rate was $1, 650. 000/35, 000 = 547. 14 per DLH.The overhead allocated to each product using Rex's rate was as follows : Product* 123 = 5 DLH X 547. 14 = $235. 70 Product ROOT = 15 DLH * 547. 14 = $707. 10 But Rex was losing sales of product ROOT to his competitor who was able to sell a similar product at a lower price , and recover all costs of production . Additional information " Tables } and & show how much direct labour and machine time is consumed by each product in each production department . Table 3: Machine hours ( MH ) consumed by each product in production departments . Machining dept Assembly dept Total per unit of product Per unit of produid 15 MH Per unit of X 123 14.5 MH 0. 5 MH * 123 Per unit of product 5 MH Per unit of ROOT $25 MH O. 75 MH ROOTTable 4: Direct labour hours (OLH ) consumed by each product in production department's* Machining dept Assembly dept Total per unit of product Per unit of product 5 DLH per unit of * 123 Z DLH 3 DLH product* 1 23 Per unit of product 15 DLH per unit of ROOT 1.5 DLH 13.5 DLH product ROOT Required |) Calculate departmental overhead rates and apply them to the product lines* ( 6 marks )` 1 ) Compare the departmental rates to the plantwide rate . Do you agree or disagree with Rex's plantwide overhead allocation method ? Explain . You should draw on information provided in Tables 1 to 4 to explain and support your answer . Based on your explanation in fill above , recommend a rate that Rex should use* ( 10 marks) lil) Would ABC improve the way in which overhead is allocated in this firm ? Without carrying out any additional calculations , explain why this may or may not be the case . You should briefly explain how the ABC system works . Then elaborate on how it differs from the plantwide and departmental approaches , and how these differences impact on the amount of overhead allocated to a cost object . Max number of words for part (ill is 300 words . (9 marks* )I) Calculate departmental overhead rates and apply them to the product lines . (15. mark's ) Machine Overhead Rate = 51, 300, 000 = 2300 0 MIH 556. 52 / MH Assembly Overhead Rate = 5350, 000 300OO OLH 511 . 67 / DLH Application of Overheads Product* 123 Product R.907 Machine Department $56. 52 X 14. 5 MH 556.52 X 4. 25 MIH 5819.54 5240. 21 Assembly Department $1 1. 67 * 3 DLH $11. 67 * 13. 5 DLH 535. 01 5157. 55 Total Overhead Applied 5854.55 5397. 76 Department overhead rates accumulate the overhead cost of each department and use the appropriate cost driver to each department . In this case , I used machine hours as the cost driver for Machine department as it had highly automated operations . Whereas , in Assembly department I have used direct labour hours as the cast driver , due to it being labour -intensive operation .lil Compare the departmental rates to the plantwide rate . Do you agree on disagree with Rex's plantwide overhead allocation method ? Explain . You should draw on information provided in Tables 1 to $ to explain and support your answer . Based on your explanation in lilj above , recommend a rate that Rex should use . ( 10 marks! Application of Overheads Product* 123 Product R.907 Plant wide rate $235. 70 5707. 10 Department rates 5854. 55 5397. 76 According to table 1 , Product* 123 (15 MH ) seems to have higher proportionate of machine hours compare to Product R.907 15 MH) , making it machine intensive to produce . Whereas , Product R.907 1 15 MH ) utilise more direct labour hours to produce a unit compare to Product* 123 , this proves that it is labour intensive to produce . Well, table 2 provides the information on the annual overhead cost and the production activity by the Machine department and Assembly department it complements the previous figure in table I for Product* 123 being machine* intensive and Product ROOT being labour intensive . This is backed by the machine* hours usedlily Would ABC improve the way in which overhead is allocated in this firm ?" Without carrying out any additional calculations , explain why this may or may not be the case . You should briefly explain how the ABC system works . Then elaborate on how it differs from the plantwide and departmental approaches , and how these differences impact on the amount of overhead allocated to a cost object . Max number of words for part ( jill is 300 words . (9 mark's ) Activity based costing is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each . Whereas Plantwide allocation uses a single cost of the whole factory and divide with an individual cost driver . And In case of Departmental allocation , the cost pool is from each department and each department is divided with their relevant cost driver ( depending on the department being labour or machine intensive ) .\\