1. Compute plantwide overhead rates
Renfro Manufacturing identified the following data in its two production departments.
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Assembly
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Finishing
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Manufacturing overhead costs....
Direct labor hours worked...........
Machine hours used...................
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$600,000 12,000 DLH 6,000 M H
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$1,200,000 20,000 DLH 16.000 MH
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1. What is the company's single plantwide overhead rate based on direct labor hours?
2. What is the company's single plantwide overhead rate based on machine hours?
3. What are the company's departmental overhead rates if the assembly department assigns overhead based on direct labor hours and the finishing department assigns overhead based on machine hours?
II. Using the plantwide overhead rate to assess prices
Real Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.
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Process
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Activity
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Overhead Cost
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Driver
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Quantity
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Components
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Changeover
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$500.000
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Number of batches 800
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Machining
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279.000
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Machine hours 6,000
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Setups
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225.000
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Number of setups 120
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$1.004.000
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Finishing
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Welding
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$180.300
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Welding hours 3.000
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Inspecting
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210,000
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Number of inspections 700
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Rework
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75,000
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Rework orders 300
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$465,300
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Support
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Purchasing
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$135.000
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Purchase orders 450
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Providing space
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32.000
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Number of units 5,000
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Providing utilities
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65,000
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Number of units 5,000
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Model 145
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Model 212
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Units produced ..................
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1,500
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3,500
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Welding hours ...................
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800
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2,200
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Batches ............................
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400
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400
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Number of inspections ........
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400
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300
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Machine hours ...................
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1.800
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4.200
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Setups .............................
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60
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60
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Rework orders ...................
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160
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140
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Purchase orders ................
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300
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ISO
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1. Using a plantwide overhead rate based on machine hours, compute the overhead cost per unit for each product line.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $180 for Model 212.
3. If the market price for Model 145 is $800 and the market price for Model 212 is $470, determine the profit or loss per unit for each model. Comment on the results.
III. Using ABC for strategic decisions
Consider the following data for two products of Vigano Manufacturing.
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Overhead Cost
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Product A
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Product B
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Number of units produced .................
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10,000 units
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2,000 units
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Direct labor cost (@$24 per DLH) ........
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0.20 DLH per unit
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0.25 DLH per unit
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Direct materials cost.........................
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$2 per unit
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$3 per unit
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Activity
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Machine setup .....................................
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$121,000
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Materials handling ...............................
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48,000
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Quality control .............................
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80,000
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$249,000
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1. Using direct labor hours as the basis for assigning overhead costs, determine the total production cost per unit for each product line.
2. If the market price for Product A is $20 and the market price for Product B is $60, determine the profit or loss per unit for each product. Comment on the results.
3. Consider the following additional information about these two product lines. If ABC is used for assigning overhead costs to products, what is the cost per unit for Product A and for Product B?
Number of setups required for production 10 setups 12 setups
Number of parts required I part/unit 3 parts/unit
Inspection hours 40 hours 210 hours
4. Determine the profit or loss per unit for each product. Should this information influence company strategy? Explain.
IV. Using ABC in a service company
Singh and Smythe is an architectural firm that provides services for residential construction projects. The following data pertain to a recent reporting period.
Activities costs
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Design department
Client consultation ................................... 1,500 contact hours $270,000
Drawings ............................................................. 2,000 design hours I 15,000
Modeling .............................................................. 40,000 square feet 30,000
Project management department
Supervision .............................................. 600 days $ 120.000
Billings ................................................................ 8 jobs 10,000
Collections ............................................... 8 jobs 12,000
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1. Using ABC, compute the firm's activity overhead rates. Form activity cost pools where appropriate.
2. Assign costs to a 9,200 square foot job that requires 450 contact hours, 340 design hours, and 200 days to complete.
V. Evaluating product line costs and prices using ABC
Healthy Day Company produces two beverages, PowerPunch and SlimLife. Data about these products follow.
Production volume ............ 12,500 bottles 37,000 gallons
Liquid materials ....................... 1,400 gallons 12,000 pounds
Dry materials ................... 620 pounds 180.000 bottles
Bottles .................................... 12,500 bottles I label per bottle
Labels ..................................... 3 labels per bottle 300 setups
Machine setups ........................ 500 setups 3.750 MH
Machine hours ........................... 200 MH
Additional data from its two production departments follow:
1. Determine the cost of each product line using ABC.
2. What is the cost per bottle for PowerPunch? What is the cost per bottling of SlimLife?
(Hint: Your answer should draw on the total cost for each product line computed in requirement 1.)
3. If PowerPunch sells for $3.75 per bottle, how much profit does the company earn per bottle of PowerPunch that it sells?
4. What is the minimum price that the company should set per bottle of SlimLife? Explain.