Exercise 4.15 - Exercise 4.15 1 Overhead rate = $2,080,000\/8,000 = $260 per direct labor hour Model A Model B Direct materials $ 600,000 $ 800,000

Exercise 4.15 - Exercise 4.15 1 Overhead rate =...

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Exercise 4.15 1. Overhead rate = $ 2,080,000/ 8,000 = $ 260 per direct labor hour Model A Model B Direct materials ......... $ 600,000 $ 800,000 Direct labor ................ 480,000 480,000 Overhead* .................. 1,560,000 520,000 Total cost ................... $ 2,640,000 $ 1,800,000 Units .......................... ÷ 16,000 ÷ 8,000 Unit cost .................... $ 165 $ 225 *Overhead assigned = $ 260 × 6,000 hours; $ 260 × 2,000 hours 2. Activity rates: Setups: $ 480,000/ 600 = $ 800 per setup Ordering: $ 360,000/ 18,000 = $ 20 per order Machining: $ 840,000/ 42,000 = $ 20 per machine hour Receiving: $ 400,000/ 10,000 = $ 40 per receiving hour Model A Model B Direct materials ......... $ 600,000 $ 800,000 Direct labor ................ 480,000 480,000 Overhead: Setups .................. 320,000 160,000 ($ 800 × 400; $ 800 × 200) Ordering ............... 120,000 240,000 ($ 20 × 6,000; $ 20 × 12,000) Machining ............ 480,000 360,000 ($ 20 × 24,000; $ 20 × 18,000) Receiving ............. 120,000 280,000 ($ 40 × 3,000; $ 40 × 7,000) Total costs ................. $ 2,120,000 $ 2,320,000 Units .......................... ÷ 16,000 ÷ 8,000 Unit cost .................... $ 132.50 $ 290.00 3. In a firm with product diversity and significant non-unit overhead costs, multiple rates using unit and non-unit drivers produce better cost assignments because the demands of the products for overhead activities are more fully considered. Specifically, there are three non-unit activities, causing $1,240,000 out of the $2,080,000 of overhead costs. These non-unit costs should be assigned using non-unit cost drivers. Thus, the ABC approach with multiple drivers is more accurate.
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