Q20E_2 - Horngren'S Financial And Managerial Accounting

Question

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018: 

        Activity                         Allocation Base                  Predetermined Overhead

                                                                                                     Allocation Rate

Materials handling              Number of parts                              $ 4.00 per part

Machine setup                   Number of setups                           400.00 per setup

Insertion of parts                 Number of parts                              26.00 per part

Finishing                       Number of finishing hours                    90.00 per hour

 

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:

 

                                                                     Standard                     Deluxe

Parts per rim                                                    4.0                             7.0

Setups per 500 rims                                      18.0                           18.0

Finishing hours per rim                                  1.0                             5.5

Total direct hours per rim                               5.0                             6.0

 

The company expects to produce 500 units of each model during the year.

 

Requirements

2. Prior to 2018, Eason used a single plantwide overhead allocation rate system with direct labor hours as the allocation base. Compute the predetermined overhead allocation rate based on direct labor hours for 2018. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the nearest cent.

Step-by-Step Solution

Answer

Predetermined overhead allocation rate: $30.93

Per unit indirect cost for Standard model: $155

Per unit indirect cost for Deluxe model: $186

Step-by-Step-Solution Step 1: Computation of single plantwide overhead allocation rate

$\begin{array}{c}\mathbf{Predetermined}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{rate}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{estimated}\mathbf{ }\mathbf{indirect}\mathbf{ }\mathbf{cost}}{\mathbf{Total}\mathbf{ }\mathbf{direct}\mathbf{ }\mathbf{labor}\mathbf{ }\mathbf{hour}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{463}\mathbf{,}\mathbf{900}}{\mathbf{(}\mathbf{5}\mathbf{+}\mathbf{6}\mathbf{)}\mathbf{\times }\mathbf{500}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{463}\mathbf{,}\mathbf{900}}{\mathbf{15}\mathbf{,}\mathbf{000}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{30}\mathbf{.}\mathbf{93}\end{array}$

Step 2: Per unit indirect cost for the standard model

$$\begin{gathered} \mathbf{Per}\mathbf{ }\mathbf{unit}\mathbf{ }\mathbf{cost}\mathbf{=}\mathbf{Predetermined}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{allocationrate}\mathbf{\times }\mathbf{Direct}\mathbf{ }\mathbf{labor}\mathbf{ }\mathbf{hour}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{rim}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{standardmodel} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{30}\mathbf{.}\mathbf{93}\mathbf{\times }\mathbf{5} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{155} \end{gathered}$$

Step 3: Per unit indirect cost for the deluxe model

$$\begin{gathered} \mathbf{Per}\mathbf{ }\mathbf{unit}\mathbf{ }\mathbf{cost}\mathbf{=}\mathbf{Predetermined}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{rate}\mathbf{\times }\mathbf{Direct}\mathbf{ }\mathbf{labor}\mathbf{ }\mathbf{hour}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{rim}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{deluxe}\mathbf{ }\mathbf{model} \\ \begin{array}{c}\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{30}\mathbf{.}\mathbf{93}\mathbf{\times }\mathbf{6}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{186}\end{array} \end{gathered}$$