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Q1) Erte, Inc., produces two models of high pressure steam valves, XR7 model and ZD5 model. Data regarding two products follow:

Products Direct labor-hours Annual production Total Direct labor-hours
XR7 0.2 DLHs per unit 20,000 units 4,000 DLHs
ZD5 0.4 DLHs per unit 40,000 units 16,000 DLHs
      20,000 DLHs

Extra information about company follows:

a. Product XR7 needs $35 in direct materials per unit, and product ZD5 requires $25.

b. Direct labor rate is $20 per hour.

c. Company has always used direct labor-hours as base for applying producing overhead cost to products. Manufacturing overhead totals $1,480,000 per year.

d. Product XR7 is more complex to produce than product ZD5 and needs use of special milling machine.

e. Because of the special work required in (d) above, company is considering use of activity-based costing to apply overhead cost to products. Three activity cost pools have been recognized and first-stage allocations have been completed. Data concerning these activity cost pools appear below:

Suppose that company continues to use direct labor-hours as bas for applying overhead cost to products.

Describe why overhead cost shifted from high-volume product to low-volume product under activity-based costing.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M918349

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