153k views
1 vote
Rahm Ltd manufactures two types of golf carts (the All-Terrain and the Rugged). Rahm Ltd’s current policy is to allocate indirect overhead costs using the traditional (absorption) method which uses one rate based on direct labour hours. You have been provided with the following information:

Indirect Costs

Cost

Rent

$4,000,000

Electricity

$3,200,000

Depreciation

$1,200,000

Supervisor Salaries

$1,800,000


All-Terrain Cart

Rugged Cart

Direct Labour hours used

80,000 hours

40,000 hours

Required:

4a) Calculate the indirect overhead rate using traditional (absorption costing). Show calculations.

4b) Using the information available in Question 1a, calculate the overhead allocated to each type of product. Show calculations.

Over the past year it has become apparent that the assumption of allocating overhead based on direct labour hours might not be appropriate. Rahm Ltd has hired you as a management consultant to look at an activity-based costing (ABC) approach. The company has provided you with the following information:

Activity Description

Total Cost

Cost driver

Set-up of machines for production

$2,000,000

No. of machine set-ups

Movement of materials from the warehouse to the production line

$1,400,000

No. of production batches

Assembly of carts

$5,000,000

No. of direct labour hours

Quality inspections

$1,800,000

No. of quality tests performed

The following data relates to 2021:


All-Terrain Cart

Rugged Cart

No. of machine set-ups

500

750

No. of production batches

200

150

No. of direct labour hours

80,000

40,000

No. of quality tests performed

1,000

1,800

Required:

4c) Calculate the cost per unit of the cost driver.

4d) Using the information provided in 4c, calculate the overhead cost for each type of product using Activity Based Costing (ABC). Show all calculations.

User Algiecas
by
7.6k points

1 Answer

3 votes

4a) To calculate the indirect overhead rate using the traditional (absorption) method, we need to add up the total indirect costs and divide them by the total direct labor hours.

Total indirect costs = Rent + Electricity + Depreciation + Supervisor Salaries
= $4,000,000 + $3,200,000 + $1,200,000 + $1,800,000
= $10,200,000

Total direct labor hours = Direct labor hours used for All-Terrain Cart + Direct labor hours used for Rugged Cart
= 80,000 hours + 40,000 hours
= 120,000 hours

Indirect overhead rate = Total indirect costs / Total direct labor hours
= $10,200,000 / 120,000 hours
= $85 per direct labor hour

Therefore, the indirect overhead rate using the traditional (absorption) method is $85 per direct labor hour.

4b) To calculate the overhead allocated to each type of product, we need to multiply the indirect overhead rate by the direct labor hours used for each type of cart.

Overhead allocated to All-Terrain Cart = Indirect overhead rate * Direct labor hours used for All-Terrain Cart
= $85 * 80,000 hours
= $6,800,000

Overhead allocated to Rugged Cart = Indirect overhead rate * Direct labor hours used for Rugged Cart
= $85 * 40,000 hours
= $3,400,000

Therefore, the overhead allocated to the All-Terrain Cart is $6,800,000 and the overhead allocated to the Rugged Cart is $3,400,000.

4c) To calculate the cost per unit of the cost driver for each activity, we need to divide the total cost of each activity by the total number of units of the cost driver.

Cost per unit of machine set-up = Cost of machine set-up / Number of machine set-ups
= $2,000,000 / (500 + 750)
= $2,000,000 / 1,250
= $1,600

Cost per unit of material movement = Cost of material movement / Number of production batches
= $1,400,000 / (200 + 150)
= $1,400,000 / 350
= $4,000

Cost per unit of assembly = Cost of assembly / Number of direct labor hours
= $5,000,000 / (80,000 + 40,000)
= $5,000,000 / 120,000
= $41.67

Cost per unit of quality inspection = Cost of quality inspection / Number of quality tests performed
= $1,800,000 / (1,000 + 1,800)
= $1,800,000 / 2,800
= $642.86

Therefore, the cost per unit of machine set-up is $1,600, the cost per unit of material movement is $4,000, the cost per unit of assembly is $41.67, and the cost per unit of quality inspection is $642.86.

4d) To calculate the overhead cost for each type of product using Activity Based Costing (ABC), we need to multiply the cost per unit of the cost driver by the number of units of the cost driver for each type of cart.

Overhead cost for All-Terrain Cart = Cost per unit of machine set-up * Number of machine set-ups for All-Terrain Cart
+ Cost per unit of material movement * Number of production batches for All-Terrain Cart
+ Cost per unit of assembly * Number of direct labor hours for All-Terrain Cart
+ Cost per unit of quality inspection * Number of quality tests performed for All-Terrain Cart

Overhead cost for Rugged Cart = Cost per unit of machine set-up * Number of machine set-ups for Rugged Cart
+ Cost per unit of material movement * Number of production batches for Rugged Cart
+ Cost per unit of assembly * Number of direct labor hours for Rugged Cart
+ Cost per unit of quality inspection * Number of quality tests performed for Rugged Cart

Overhead cost for All-Terrain Cart = $1,600 * 500 + $4,000 * 200 + $41.67 * 80,000 + $642.86 * 1,000
Overhead cost for Rugged Cart = $1,600 * 750 + $4,000 * 150 + $41.67 * 40,000 + $642.86 * 1,800

Calculating the overhead costs for each type of product using the given information and the cost per unit of the cost driver will give the final answers.

Please let me know if I can help you with anything else.

User Jack Danger
by
8.4k points