Question

In comparing the traditional system with the activity-based costing system, which of Ergaster’s models had higher unit...


In comparing the traditional system with the activity-based costing system, which of Ergaster’s models had higher unit product costs under the traditional system? Based on this problem:
Ergaster Corporation manufactures a variety of products. In the past, Ergaster has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Ergaster has decided to switch to an activity based costing system for manufacturing overhead costs using three activity cost pools. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year is as follows: (see image) 11. Under the activity-based costing system, what would be the selling price of one unit of Model #36?

Transcribed: Activity cost pool Estimated Activity Machine Setups Quality Control Other Overhead 30,000 machine hours Estimated Overhead Cost P150,000 180,000 480,000 400 setups 1,500 inspections Information (on a per unit basis) related to three popular products at Ergaster are as follows: Model #19 Model #36 Model #58 Direct material cost Direct labor cost Number of setups Number of inspections P400 P540 P310 P810 P600 P220 3 1 1 3 Number of machine hours 4 8 10

Answer

Activity rates of each Activity using activity-based costing

Activity  Activity Driver Cost Activity usage Activity Rate
Machine Setup Setups 150000 400.00 375
Quality Control Inspections 180000 1500.00 120
Other Overhead Machine Hours 480000 30000.00 16

Overhead Allocatation to model 36 on the basis of activity rate calculated in step 1.

Activity  Activity Driver Activity Rate Activity usage Cost allocated
Machine Setup Setups 375 3.00 1125
Quality Control Inspection 120 3.00 360
Other Overhead machine Hours 16 8.00 128
Total Overhead allocated 1613

 

Calculation of selling price per unit of model 36

Total Cost  
Direct Material 540
Direct Labor 600
Overhead allocated 1613
Total Cost 2753
Selling Price (2753 x 200%) 5506
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