Problem 5‐46
Overhead applied on the basis of direct labor hours
Anticipated overhead $800,000; anticipated direct labor time 25,000 hours
Standard:
Estimated production volume: 3,000 units
Direct material cost: $25/unit
Direct labor/unit: 3 hours @ $12/hour
Direct labor/unit: 3 hours @ $12/hour
Enhanced:
Estimated production volume: 4,000 units
Direct material cost: $40/unit
Direct labor/unit: 4 hours @ $12/hour
Activities: order processing ‐ $150,000; machine processing ‐
$560,000; production inspection ‐ $90,000
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Problem 5‐46 (continued)
Orders Processed
Machine Hours
Worked
Inspection Hours
Standard
300
18,000
2,000
Enhanced
200
22,000
8,000
TOTAL
500
40,000
10,000 ©Dr. Chula King
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Problem 5‐46 (continued)
Part 1: Compute unit manufacturing costs of Standard and Enhanced, assuming the use of direct labor hours to apply overhead.
Applied Overhead Rate/unit = Budgeted Overhead ÷ Budgeted Direct Labor Hours
Budgeted Overhead: $800,000
Budgeted Direct Labor Hours: (3,000 x 3/hour) + (4,000 x 4/hour) = 25,000
Applied Overhead Rate/unit = 800,000 ÷
l d
h d
/
25,000 = $32/direct labor hour
$ /d
l b h
Standard
Enhanced
Direct Materials
$ 25
$ 40
Direct Labor
36 (3x12)
48 (4x12)
128 (4x32)
Overhead
96 (3x32)
$216
Unit Mfg Cost
$157
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1
Problem 5‐46 (continued)
Part 2: Compute unit manufacturing costs of Standard and Enhanced using ABC
Activity
Cost
Cost Driver
Application Rate
Order processing $150,000 500 Orders Proc $300/Order Proc
Machine processing 560,000 40,000 MH
14/MH
Product inspection 90,000 10,000 Insp. Hr
9/Insp Hr
Standard
Enhanced
Order Processing $ 90,000 (300 x $300) $ 60,000 (200 x $300)
Machine Processing
252,000 (18,000 x $14) 308,000 (22,000 x $14)
72,000 (8,000 x $9)
Product Inspection
18,000 (2,000 x $9)
Total
$360,000
$440,000
# units
÷ 3,000
÷ 4,000
OH Cost/unit
$ 120
$ 110
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Problem 5‐46 (continued)
Part 2 (continued)
Direct Materials
Direct Labor
Mfg Overhead
Total Cost/Unit under ABC
Standard
$ 25
36 (3 x 12)
120
$ 181
Enhanced
$ 40
48 (4x12)
110
$ 198
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Problem 5‐46 (continued)
Part 3(a): If direct labor hours is used to allocate overhead, determine which product is overcosted and which product is undercosted, and by what amount.
Standard
Enhanced
Cost/unit using direct labor hours
$157
$216
198
Cost/unit using ABC 181
(undercosted)/overcosted
$( 24)
$ 18
Part 3(b): Is it possible that the undercosting/overcosting are contributing to the company’s profit woes?
Yes, because the selling price is primarily based on cost. If the product is overcosted, its resulting selling price could be too high, causing customers to go elsewhere for a comparable product with a lower price. If the product is undercosted, its resulting selling price may be too low to properly cover the cost of the product.
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2