Question

Plant-wide, department, and activity-cost rates. Acclaim Inc. makes two styles of trophies, basic and deluxe, and operates at capacity. Acclaim does large custom orders. Acclaim budgets to produce 10,000 basic trophies and 5,000 deluxe trophies. Manufacturing takes place in two production departments: forming and assembly. In the forming department, indirect manufacturing costs are accumulated in two cost pools, setup and general overhead. In the assembly department, all indirect manufacturing costs are accumulated in one general overhead cost pool. The basic trophies are formed in batches of 200 but be-cause of the more intricate detail of the deluxe trophies, they are formed in batches of 50.

The controller has asked you to compare plant-wide, department, and activity-based cost allocation.

Forming Department Basic Delux Total
$60,000 $35,000 $95,000
Direct manufacturing labor $30,000 $20,000 $50,000
Overhead costs Setup $48,000
General overhead $32,000

Assembly Department Basic Delux Total
Direct materials $50,000 $10,000 $15,000
Direct manufacturing labor 15,000 25,000 40,000
Overhead costs Setup
General overhead 40,000


Required:
a. Calculate the budgeted unit cost of basic and deluxe trophies based on a single plant-wide overhead rate, if total overhead is allocated based on total direct (Don't forget to include direct material and direct manufacturing labor cost in your unit cost calculation.)
b. Calculate the budgeted unit cost of basic and deluxe trophies based on departmental overhead rates, where forming department overhead costs are allocated based on direct manufacturing labor costs of the forming department and assembly department overhead costs are allocated based on total direct manufacturing labor costs of the assembly department
c. Calculate the budgeted unit cost of basic and deluxe trophies if Acclaim allocates overhead costs in each department using activity-based costing, where setup costs are allocated based on number of batches and general overhead costs for each department are allocated based on direct manufacturing labor costs of each department.
d. Explain briefly why plant-wide, department, and activity-based costing systems show different costs for the basic and deluxe trophies. Which system would you recommend and why?

Answer 1

Acclaim Inc.

Basic Trophies Deluxe Trophies

Budgeted unit cost:

a. using single-plant o/h rate $17.60 $28.80

b. using departmental rates $17.42 $29.16

c. using ABC $18.26 $27.48

d. They show different costs because the overhead rates are based on different parameters.

I recommend ABC system. It is more fair because the overhead rates are based on product line's activity usage instead of an arbitrary figure.

Step-by-step explanation:

a) Data and Calculations:

Basic Trophies Deluxe Trophies Total

Budgeted production 10,000 5,000 15,000

Batches 200 50 250

Basic Trophies Deluxe Trophies Total

Forming Department $60,000 $35,000 $95,000

Direct manufacturing labor $30,000 $20,000 $50,000

Assembly

Direct materials $5,000 $10,000 $15,000

Direct manufacturing labor 15,000 25,000 40,000

Total direct costs $110,000 $90,000 $200,000

Overhead costs 66,000 54,000 120,000

Total production costs $176,000 $144,000 $320,000

Budgeted production 10,000 5,000

Budget unit costs $17.60 $28.80

Overhead rate

Total overhead/total direct costs = $120,000/$200,000 = $0.60

Basic Deluxe Total

Trophies Trophies

Forming department:

Overhead costs Setup $48,000

General overhead $32,000

Total overhead costs $80,000

Overhead rate = $80,000/$145,000 = $552

Assembly department

General overhead $40,000/$55,000 = $0.727

Basic Trophies Deluxe Trophies Total

Forming Department $60,000 $35,000 $95,000

Direct manufacturing labor $30,000 $20,000 $50,000

Total direct costs $90,000 $55,000 $145,000

Overhead costs 49,680 30,360 80,040

Total departmental costs $139,680 $85,360 $225,040

Assembly

Direct materials $5,000 $10,000 $15,000

Direct manufacturing labor 15,000 25,000 40,000

Total direct costs $20,000 $35,000 $55,000

Overhead costs 14,540 25,445 39,985

Total departmental costs $34,540 $60,445 $94,985

Total production costs $174,220 $145,805 $320,025

Budgeted production 10,000 5,000

Budget unit costs $17.42 $29.16

Basic Trophies Deluxe Trophies Total

Forming Department $60,000 $35,000 $95,000

Direct manufacturing labor $30,000 $20,000 $50,000

Assembly

Direct materials $5,000 $10,000 $15,000

Direct manufacturing labor 15,000 25,000 40,000

Total overhead allocated $72,600 $47,400 $120,000

Total production costs $182,600 $137,400 $320,000

Budgeted production 10,000 5,000

Budget unit costs $18.26 $27.48

Overhead costs allocation:

Basic Deluxe Total

Trophies Trophies

Forming department:

Overhead costs Setup $48,000/250 $38,400 $9,600 $48,000

General overhead $32,000/$50,000 19,200 12,800 32,000

Assembly department

General overhead $40,000/$40,000 15,000 25,000 40,000

Total overhead allocated $72,600 $47,400 $120,000