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by using departmental rates. (Prior to this, the company used a predetermined plantwide rate
based on units produced.) Surprisingly, after the addition of the duffel-bag line and the switch
to departmental rates, the costs to produce the backpacks increased, and their profitability
dropped.
Josie, the marketing manager, and Steve, the production manager, both complained
about the increase in the production cost of backpacks. Josie was concerned because the
increase in unit costs led to pressure to increase the unit price of backpacks. She was resisting
this pressure because she was certain that the increase would harm the company’s market
share. Steve was receiving pressure to cut costs also, yet he was convinced that nothing different
was being done in the way the backpacks were produced. After some discussion, the two
managers decided that the problem had to be connected to the addition of the duffel-bag
line.
Upon investigation, they were informed that the only real change in product-costing procedures
was in the way overhead costs are assigned. A two-stage procedure was now in use.
First, overhead costs are assigned to the two producing departments, Patterns and Finishing.
Second, the costs accumulated in the producing departments are assigned to the two products
by using direct labor hours as a driver (the rate in each department is based on direct labor
hours). The managers were assured that great care was taken to associate overhead costs with individual
products. So that they could construct their own example of overhead cost assignment,
the controller provided them with the information necessary to show how accounting costs are
assigned to products:
Department
Patterns Finishing Total
Accounting cost $30,000 $90,000 $120,000
Transactions processed 20,000 60,000 80,000
Total direct labor hours 15,000 30,000 45,000
Direct labor hours per backpack* 0.10 0.20 0.30
Direct labor hours per duffel bag* 0.20 0.40 0.60
*Hours required to produce one unit of each product.
The controller remarked that the cost of operating the accounting department had doubled
with the addition of the new product line. The increase came because of the need to process
additional transactions, which had also doubled in number.
During the first year of producing duffel bags, the company produced and sold 100,000
backpacks and 25,000 duffel bags. The 100,000 backpacks matched the prior year’s output for
that product.
Required:
(Note: Round rates and unit cost to the nearest cent.)
1. CONCEPTUAL CONNECTION Compute the amount of accounting cost assigned to a
backpack before the duffel-bag line was added by using a plantwide rate approach based
on units produced. Is this assignment accurate? Explain.
2. Suppose that the company decided to assign the accounting costs directly to the product
lines by using the number of transactions as the activity driver. What is the accounting
cost per unit of backpacks? Per unit of duffel bags?
3. Compute the amount of accounting cost assigned to each backpack and duffel bag by
using departmental rates based on direct labor hours.
4. CONCEPTUAL CONNECTION Which way of assigning overhead does the best job—the
functional-based approach by using departmental rates or the activity-based approach by
using transactions processed for each product? Explain. Discuss the value of ABC before
the duffel-bag line was added.
Jawaban dan Penjelasan
Berikut ini adalah pilihan jawaban terbaik dari pertanyaan diatas.
Answer:
>>> Accountancy
- Number 1
Under the plantwide rate approach, the total overhead cost is divided by the total number of units produced to get the overhead rate per unit. The total overhead cost is $120,000 and the total number of units produced is 100,000 backpacks. Therefore, the plantwide rate per backpack is $1.20 ($120,000 ÷ 100,000). This assignment is not accurate because the plantwide rate approach assumes that all products consume overhead costs in the same proportion, which may not be true. The addition of the duffel-bag line may have changed the cost structure of the company, and assigning overhead costs based on a single rate may distort the true cost of each product.
- Number 2
If the company decided to assign accounting costs directly to the product lines by using the number of transactions as the activity driver, the accounting cost per unit of backpacks would be $0.20 ($30,000 ÷ 100,000) and the accounting cost per unit of duffel bags would be $0.40 ($90,000 ÷ 25,000).
- Number 3
To assign accounting costs using departmental rates based on direct labor hours, we need to calculate the overhead rate for each department. The overhead rate for Patterns is $2.00 ($30,000 ÷ 15,000) per direct labor hour, and the overhead rate for Finishing is $3.00 ($90,000 ÷ 30,000) per direct labor hour. Then, we can allocate the overhead costs to each product based on the direct labor hours required to produce each unit:
Backpacks:
Backpacks:Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000
Backpacks:Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000Finishing: 0.20 DLH per unit x 100,000 units x $3.00 per DLH = $60,000
Backpacks:Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000Finishing: 0.20 DLH per unit x 100,000 units x $3.00 per DLH = $60,000Total overhead cost assigned to backpacks = $80,000
Backpacks:Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000Finishing: 0.20 DLH per unit x 100,000 units x $3.00 per DLH = $60,000Total overhead cost assigned to backpacks = $80,000Overhead cost per unit of backpacks = $0.80 ($80,000 ÷ 100,000)
> Duffel bags:
Duffel bags:Patterns: 0.20 DLH per unit x 25,000 units x $2.00 per DLH = $10,000
Duffel bags:Patterns: 0.20 DLH per unit x 25,000 units x $2.00 per DLH = $10,000Finishing: 0.40 DLH per unit x 25,000 units x $3.00 per DLH = $30,000
Total overhead cost assigned to duffel bags = $40,000
Total overhead cost assigned to duffel bags = $40,000Overhead cost per unit of duffel bags = $1.60 ($40,000 ÷ 25,000)
> Backpacks:
Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000
Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000Finishing: 0.20 DLH per unit x 100,000 units x $3.00 per DLH = $60,000
Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000Finishing: 0.20 DLH per unit x 100,000 units x $3.00 per DLH = $60,000Total overhead cost assigned to backpacks = $80,000
Patterns: 0.10 DLH per unit x 100,000 units x $2.00 per DLH = $20,000Finishing: 0.20 DLH per unit x 100,000 units x $3.00 per DLH = $60,000Total overhead cost assigned to backpacks = $80,000Overhead cost per unit of backpacks = $0.80 ($80,000 ÷ 100,000)
- Number 4
The activity-based approach using transactions processed for each product is likely to do a better job of assigning overhead costs accurately than the functional-based approach using departmental rates based on direct labor hours. The reason is that the activity-based approach identifies the specific activities that drive overhead costs and assigns these costs directly to each product based on the actual consumption of each activity. In contrast, the functional-based approach assumes that overhead costs are driven by direct labor hours, which may not reflect the true consumption of overhead resources by each product. Before the duffel-bag line was added, the plantwide rate approach may have been appropriate because the company produced only one product, and the cost structure was relatively simple. However, with the addition of a new product line, the cost structure became more complex, and a more accurate method of overhead cost assignment, such as activity-based costing, may be necessary.
- 5 March 2023
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