Question: Casey’s Kitchens’ three cost pools and overhead estimates are as follows:
Cost Pool Cost Driver Est. Overhead
Machine Setups Setups $250000
Assembly Numbers of Parts $300000
Machine Maintenance Machine hours $500000
Total $1,050,000
Cost Driver Use per Product A Use per Product B Total
Setups 7000 3000 10000
Numbers of Parts 25000 35000 60000
Machine hours 10000 40000 50000
The Question is the Extension of previous question in the book and the only required data from the previous question for this question is Number of units produced of A and B which is 20000 units and 50000 units.
Compare the overhead allocation using:
The traditional allocation method
The activity-based costing method
(Hint: the traditional method uses machine hours as the allocation base.)
Answer:
TRADITIONAL ABSORPTION COSTING
Step 1: Identify Absorption Basis
Here absorption basis is Machine hours.
Step 2: Find the Overhead Absorbed by total units of Product A and B.
The formula is as under:
Overhead Absorbed=Total Overhead * Absorption Basis Share/Total Absorption Basis
For Product A:
Overhead absorbed =$1,050,000 * 10000 Machine Hrs/50000 Machine Hrs= $210,000 overhead absorbed in 20000 units of product A.
For Product B:
Overhead absorbed =$1,050,000 * 40000 Machine Hrs/50000 Machine Hrs= $840,000 overhead absorbed in 50000 units of product B.
Step 3: Divide the Overhead Absorbed by Number of units to compute Overhead per Unit
Overhead per unit of A= Overhead absorbed by A / Total units of A
Overhead per unit of A= $210,000/ 20,000 Units= $10.5 per Unit
Overhead per unit of B= Overhead absorbed by B / Total units of B
Overhead per unit of A= $840,000/ 50,000 Units= $16.8 per Unit
Step 4: Add the per unit prime cost to Overhead cost per unit calculated in the Step 3 to calculate the total unit cost of the product.
The prime cost per unit is not given in this question but let us assume that it is $10 per unit for product A and $20 per unit for product B.
Now
For product A:
Total Unit cost of product A= Overhead cost per unit for A + Prime cost per unit for A
Total Unit cost of product A= $10.5 per unit + $10 per unit= $20.5 per unit
For product B:
Total Unit cost of product B= Overhead cost per unit for B + Prime cost per unit for B
Total Unit cost of product B= $16.8 per unit + $20 per unit= $36.8 per unit
ACTIVITY BASED COSTING
Step 1: Identify cost pools and their relevant cost drivers.
Cost Pool Cost Driver Est. Overhead
Machine Setups Setups $250000
Assembly Numbers of Parts $300000
Machine Maintenance Machine hours $500000
Step 2: Assign the cost of each activity (cost pool) on a fair basis (cost drivers) to Product A and B
Cost assigned to total products of X = Cost pool*(units of cost driver consumed by total # of Products A / total units of relevant cost driver consumed)
For Product A:
Machine setup cost
$250,000 * (7000 setups for A/ 10,000 total setups)= $175,000 for 20000 units of A
Assembly Cost
$300,000 * (25,000 number of parts for A/ 60,000 total number of parts)= $125,000 for 20000 units of A
Machine Maintenance
$500,000 * (10,000 machine hrs for A/ 50,000 total machine hrs)= $100,000 for 20000 units of A
Total Overhead cost assigned to 20000 units of Product A= $175,000 + $125,000 + $100,000=$400,000
For Product B:
Machine setup cost
$250,000 * (3000 setups for B/ 10,000 total setups)= $75,000 for 50000 units of B
Assembly Cost
$300,000 * (35,000 number of parts for B/ 60,000 total number of parts)= $175,000 for 50000 units of B
Machine Maintenance
$500,000 * (40,000 machine hrs for B/ 50,000 total machine hrs)= $400,000 for 50000 units of B
Total Overhead cost assigned to 50000 units of Product B= $75,000 + $175,000 + $400,000=$650,000
Step 3: Divide the Answer from the step 3 by total units of product A produced to calculate unit cost
Overhead cost per unit = Total Overhead cost assigned to total units of X / Total Units of X
Overhead cost per unit For Product A= $400,000/20000 Units=$20 per unit
Overhead cost per unit For Product B= $650,000/50000 Units=$13 per unit
Step 4: Add prime cost per unit to it to calculate total unit cost of each product A and B.
The prime cost per unit is not given in this question but let us assume that it is $10 per unit for product A and $20 per unit for product B.
Now
For product A:
Total Unit cost of product A= Overhead cost per unit for A + Prime cost per unit for A
Total Unit cost of product A= $20 per unit + $10 per unit= $30 per unit
For product B:
Total Unit cost of product B= Overhead cost per unit for B + Prime cost per unit for B
Total Unit cost of product B= $13 per unit + $20 per unit= $33 per unit