Allocated_Cost_vs_True_Cost

# Allocated_Cost_vs_True_Cost - Now let’s consider the cost...

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A company has two distinct products, Product A and Product B. The company allocates its manufacturing overhead using a single plant-wide rate based on direct labor hours. Additional information about the products is as follows: Product A Product B Annual Volume 20,000 units 5,000 units Annual Engineering Cost to update documentation \$25,000 \$25,000 Direct Labor Hours per unit 2 2 . What is the True Cost per unit for Annual Engineering Cost? Product A: \$25,000 / 20,000 units = \$1.25 per unit Product B: \$25,000 / 5,000 units = \$5 per unit How much Annual Engineering Cost is allocated to each unit? P.O.R. = (\$25,000 + \$25,000) / ((2 x 20,000) + (2 x 5,000)) = \$1 per dlh Product A: 2 dlh/unit x \$1/dlh = \$2 per unit Product B: 2 dlh/unit x \$1/dlh = \$2 per unit Does our allocation method over-cost or under-cost our products? Product A: Overcosts Product B: Undercosts

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Unformatted text preview: Now, let’s consider the cost of setting up a machine to produce components for the products. Each time a batch of components for Product A or a batch of components for Product B is produced it costs \$1,000 to setup the machine. Product A Product B Run (batch) size 400 units 100 units # of batches 50 batches 50 batches Total setup costs for all setups \$50,000 \$50,000 . What is the True Cost per unit for Setup Cost? Product A: \$50,000 / 20,000 units = \$2.50 per unit Product B: \$50,000 / 5,000 units = \$10.00 per unit How much Setup Cost is allocated to each unit? P.O.R. = (\$50,000 + \$50,000) / ((2 x 20,000) + (2 x 5,000)) = \$2 per dlh Product A: 2 dlh x \$2/dlh = \$4 per unit Product B: 2 dlh x \$2/dlh = \$4 per unit Does our allocation method over-cost or under-cost our products? Product A: Overcosts Product B: Undercosts...
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Allocated_Cost_vs_True_Cost - Now let’s consider the cost...

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