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Raj's Extreme Yoga Ltd. (REYL) produces two yoga stretching machines - a hard core machine and a soft core machine. The production operation is highly
Raj's Extreme Yoga Ltd. (REYL) produces two yoga stretching machines - a hard core machine and a soft core machine. The production operation is highly automated. The company currently uses an ABC system that assigns overhead on the basis of maching, quality control and material handling. For the current year, total overhead costs were estimated at $280,000. Total Iprime costs are $5.500.000 The company is thinking about switching to a traditional overhead system. The company believes the best plant wide cost driver is machine hours. The CEO asks you to provide him with your recommendation on which method would be best for the At year end, the company had incurred $290,000. of manufacturing overhead costs and 17,000 machine hours. The company adjusts any variance in manufacturing overhead charged to customers during the year to cost of goods sold. ACTIVITY COST DRIVER ESTIMATED OVERHEAD COSTS Units Produced Machining Quality Control Material handling Expected use of cost driver Hard Core Soft Core 20,000 80,000 5,000 11,000 10 30 Machine Hours # of Inspections $180,000 $60,000 $40,000 # of Moves 5 15 a) Calculate the overhead rates that the company would use under a traditional overhead system (2 marks) and the activity based costing system 13 marks) b) Calculate the total manufacturing overhead costs that would be assigned to the hard core mats and soft core mats under the activity based costing system and a traditional overhead costing system. Put a box around your final answers. (8 marks) c) Which method would you recommend to the CFO and why? Please provide both qualitative and quantitative factors. (4 marks) d) Using the traditional method, has the company over or under applied overhead and by how much? When you make the entry to close out manufacturing overhead will COGS increase or decrease
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