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Assignment 2

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Assignment 2

Uploaded by

sirak1317
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Admas University

School of Graduate Studies


Course Title: Accounting for Managers
Assignment Two

1. Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The
company has made the regular model for years; the deluxe model was introduced several years ago to tap
a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily
declined. Sales of the deluxe model have been increasing rapidly.
Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year,
management estimated that $3,080,000 in overhead costs would be incurred and the company would
produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model
requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and
labor costs per unit are given below:
Deluxe Regular
Direct materials cost per unit $50.00 $30.00
Direct labor cost per unit $30.00 $15.00

Required
a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead
costs to products. Compute the unit product cost for one unit of each model. An intern
suggested that the company use activity-based costing to cost its products. A team was formed to
investigate this idea. . It came back with the recommendation that four activity cost pools be used.
These cost pools and their associated activities are listed below:
Activity Cost Pool and Activity Measure Estimated Activity
Overhead cost Deluxe Regular Total
Purchase orders (number of orders) $ 60,000 500 1,000 1,500

Rework requests (number of requests) 280,000 800 2,000 2,800


240,000 7,000 3,000 10,000
Product testing (number of tests)
Machine-related (machine-hours) 2,500,000 4,500 8,000 12,500

$3,080,000
Required :

b. Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools.
c. Assume that actual activity is as expected for the year. Using activity-based costing, do the following:
I. Determine the total amount of overhead that would be applied to each model for the year.
II. Compute the unit product cost for one unit of each model.
d. Can you identify a possible explanation for the company’s declining profits? If so, what is it?

2. Great Company manufactures 60, 000 units of part XL-40 each year for use on its production line. The
following are the costs of making part XL-40:
Total Costs Cost per
60, 000 units unit

Direct material Br. 480, 000 Br.8


Direct labor 360, 000 6
Variable factory overhead (FOH) 180, 000 3
Fixed FOH 360, 000 6
Total manufacturing costs Br. 1, 380, 000 Br.23

Another manufacturer has offered to sell the same part to Great for Br.21 each. The fixed overhead
consists of depreciation, property taxes, insurance, and supervisory salaries. The entire fixed overhead
would continue if the Great Company bought the component except that the cost of Br. 120, 000
pertaining to some supervisory and custodial personnel could be avoided.

Instructions:

a) Should the parts be made or bought? Assume that the capacity now used to make parts
internally will become idle if the pats are purchased?
b) Assume that the capacity now used to make parts will be either (i) be rented to nearby
manufacturer for Br. 60, 000 for the year or (ii) be used to make another product that will
yield a profit contribution of Br. 250,000 per year. Should the company purchase them from
the outside supplier?

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