Allocated_Cost_vs_True_Cost

Allocated_Cost_vs_True_Cost - Now, lets 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, lets 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, lets consider the cost...

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