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Practice Problems ABC

Scott, Inc. manufactures Regular and Deluxe products, applying overhead based on direct labor hours, with anticipated overhead of $1,600,000 for 25,000 hours. The document outlines the need for calculating application rates for order processing, machine processing, and product inspection using activity-based costing, as well as determining unit manufacturing costs and overhead application under traditional costing. Lennox Industries is also considering a shift to activity-based costing for products A and B, analyzing per-unit costs, selling prices, and the impact on competitiveness.

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Adriånne Flores
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15 views3 pages

Practice Problems ABC

Scott, Inc. manufactures Regular and Deluxe products, applying overhead based on direct labor hours, with anticipated overhead of $1,600,000 for 25,000 hours. The document outlines the need for calculating application rates for order processing, machine processing, and product inspection using activity-based costing, as well as determining unit manufacturing costs and overhead application under traditional costing. Lennox Industries is also considering a shift to activity-based costing for products A and B, analyzing per-unit costs, selling prices, and the impact on competitiveness.

Uploaded by

Adriånne Flores
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Scott, Inc.

, manufactures two products, Regular and Deluxe, and applies overhead on the
basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming
accounting period are $1,600,000 and 25,000 hours, respectively. Information about the
company's products follows.
Regular— Deluxe—
Estimated production volume: 3,000 units Estimated production volume:
4,000 units
Direct materials cost: $28 per unit Direct materials cost: $42 per unit
Direct labor per unit: 3 hours at $15 per hour Direct labor per unit: 4 hours at
$15 per hour
Scott's overhead of $1,600,000 can be identified with three major activities: order
processing ($250,000), machine processing ($1,200,000), and product inspection
Orders Machine Hours Inspection
($150,000). These activities are driven by number of orders processed, machine hours
Processed Worked Hours
worked, and inspection hours, respectively. Data relevant to these activities follow.
Regular 320 16,000 4,000
Deluxe 180 24,000 6,000
Required: Total 500 40,000 10,000
1. Compute the application rates that would be used for order processing, machine
processing, and product inspection in an activity-based costing system.
2. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular
and Deluxe if the expected manufacturing volume is attained.
3. How much overhead would be applied to a unit of Regular and Deluxe if the company
used traditional costing and applied overhead solely on the basis of direct labor hours?
Which of the two products would be under-costed by this procedure? Over-costed?
Lennox Industries manufactures two products: A and B. A review of the
company's accounting records revealed the following per-unit costs and
production volumes:
A B
Production volume 2,500 5,000
(units)
Direct material $ 40 $ 60
Direct labor:
2 hours at $12 24
3 hours at $12 36
Manufacturing
overhead:
2 hours at $93 186
3 hours at $93 279
Manufacturing overhead is currently computed by spreading overhead of
$1,860,000 over 20,000 direct labor hours. Management is considering a shift to
activity-based costing in an effort to improve the firm's accounting procedures,
Cost Driver Volume
and the following data are available:
Cost Pool Cost Cost Driver A B Total
Setups $ Number of 100 20 120
240,000 setups
General factory 1,500,000 Direct labor 5,000 15,000 20,000
hours
Machine Machine hours 2,200 800 3,000
Required:
1. Compute the per-unit cost and selling price of product B by using Lennox's
current costing procedures.
2. Compute B's per-unit overhead cost of product B if the company switches to
activity-based costing.
3. Compute the total per-unit cost and selling price under activity-based costing.
4. Lennox has recently encountered significant international competition for
product B, with considerable business being lost to very aggressive suppliers.
Will activity-based costing allow the company to be more competitive with
product B from a price perspective? Briefly explain.
5. Will the cost and selling price of product A likely increase or decrease if Lennox
changes to activity-based costing? Why? Hint: No calculations are necessary.

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