Question: Product-Costing Accuracy, Consumption Ratios

Plata Company produces two products: a mostly handcrafted soft leather briefcase sold under the label Maletin Elegant and a leather briefcase produced largely through automation and sold under the label Maletin Fina. The two products use two overhead activities, with the following costs:

Setting up equipment            $ 3,000

Machining                             18,000

The controller has collected the expected annual prime costs for each briefcase, the machine hours, the setup hours, and the expected production.

                                Elegant               Fina

Direct labor                 $9,000             $3,000

Direct materials            $3,000             $3,000

Units                           3,000               3,000

Machine hours                 500               4,500

Setup hours                    100                  100

Required: 1. Conceptual Connection: Do you think that the direct labor costs and direct materials costs are accurately traced to each briefcase? Explain.

2. Calculate the consumption ratios for each activity.

3. Calculate the overhead cost per unit for each briefcase by using a plantwide rate based on direct labor costs. Comment on this approach to assigning overhead.

4. Conceptual Connection: Calculate the overhead cost per unit for each briefcase by using overhead rates based on machine hours and setup hours. Explain why these assignments are more accurate than using the direct labor costs.