Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A's production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data have been gathered for the two products.
| Product |
|
| Model A |
Model B |
| Units produced per year 10,000 |
Units produced per year 100,000 |
| Prime Costs $150,000 |
Prime Costs $1,500,000 |
| Direct Labor Hours 140,000 |
Direct labor Hours 300,000 |
| Machine Hours 20,000 |
Machine Hours 200,000 |
| Production runs 40 |
Production runs 60 |
| Inspection hours 800 |
Inspection hours 1200 |
| Maintenance hours 10,000 |
Maintenance hours 90,000 |
| Overhead costs: |
|
| Setup costs |
$270,000 |
| Inspection costs |
$210,000 |
| Machining |
$240,000 |
| Maintenance |
$270,000 |
Total overhead costs $990,000 |
|
1. Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours (Round to two decimal places).
2. Compute the overhead cost per unit for each product by using ABC (Round to two decimal places).
3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (Machine intensive) with a rate of $3.50 per machine hour and Department 2 (labor intensive) with a rate of $0.90 per direct labor hour. The consumption of these two drivers is as follows:
| Department 1 Machine Hours |
Department 2 Direct Labor hours |
| Model A 10,000 |
Model A 130,000 |
| Model B 170,000 |
Model B 270,000 |
Compute the overhead costs per unit for each product by using departmental rates.
4. Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the department rate do better than the plant rate?
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