Calculation of overhead rate using traditional, ABC and overhead cost allocation.
Venable Inc. produces golf carts. One of its plants in South Carolina produces two versions of carts: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, bigger tires, and softer seats. At the beginning of the year, the following data were prepared by the controller's office for this SC plant:
|
|
Basic Cart
|
Deluxe Cart
|
|
Expected Quantity to Produce
|
20,000
|
10,000
|
|
Selling Price
|
$1,800
|
$3,600
|
|
Direct Material and Direct Labor Costs
|
$800
|
$1,600
|
|
Machine Hours
|
5,000
|
5,000
|
|
Direct Labor Hours
|
10,000
|
10,000
|
|
Engineering Support (Hours)
|
1,500
|
4,500
|
|
Receiving (Orders Processed)
|
300
|
500
|
|
Material Handling (Number of Moves) 2,000
|
4,000
|
|
|
Purchasing (Number of Requisitions)
|
100
|
200
|
|
Maintenance (Hours Used)
|
1,000
|
3,000
|
|
Paying Suppliers (Invoices Processed)
|
250
|
500
|
|
Setting up Batches (Number of Setups)
|
20
|
60
|
Additionally, the following overhead activity center costs are reported:
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Maintaining Equipment
|
$1,140,000
|
|
Engineering Support
|
1,200,000
|
|
Material Handling
|
1,200,000
|
|
Setting Up Equipment
|
960,000
|
|
Purchasing Materials
|
600,000
|
|
Receiving Goods
|
400,000
|
|
Paying Suppliers
|
300,000
|
|
Providing Facility Space
|
200,000
|
|
Total
|
$6,000,000
|
Providing facility-level costs are allocated on basis of machine hours. This provides a measure of time the facility is used by each product.
1. Calculate the cost per cart using direct labor hours to assign overhead costs.
2. What is the gross margin on a deluxe golf cart?
3. Using ABC how much engineering overhead costs would be allocated to a basic cart?
4. Using ABC would the amount of purchasing overhead costs allocated to each type of cart be more or less for the deluxe than the basic? Provide quantitative support for your answer.