Iet Theory of Explanation

IET 105 HW7 Solution

Activity-Based Costing:
Determine the product cost per unit for each product using (1) Conventional method and (2) Activity-Based Costing method.

Resources|A|B|
Production, units|2,000|1,000|
Direct labor cost|$60,000|$60,000|
Direct materials cost|$20,000|$40,000|
Overheads:   Indirect labor|$45,500|
                    Indirect material|$23,000|
                  Utilities|$24,000|
                  Rent|$15,500|
                  Other Overheads|$10,000|
                  Total Overheads|$118,000|

Overheads of:|Driver (or based on):|
Indirect labor|65% to A and 35% to B|
Indirect material|80% to A and 20% to B|
Utilities|KW:A used 160,000 KWB used 70,000 KW|
Rent|floor space:A uses 5,000 square feetB uses 4,000 square feet|
Other|difficult to classify to A or B(use conventional approach – based on direct labor cost)|

1.
Conventional method
From|Product A Cost per unit|Product B Cost per unit|
Direct labor cost|$30.00|$60.00|
Direct materials cost|$10.00|$40.00|
Total overheads|0.5*118,00/2000=$29.50|0.5*118,000/1000 =$59.00|
Total Cost|$69.50|$159.00|
2. Activity-Based Costing method
Overheads of:|Driver (or based on):|In proportion of:|
Indirect labor|65% to A and 35% to B|0.65 to A|
||0.35 to B|
Indirect material|80% to A and 20% to B|0.80 to A|
||0.20 to B|
Utilities|KWA used 160,000 KWB used 70,000 KW|0.696 to A|
||0.304 to B|
Rent|floor spaceA uses 5,000 sq/ftB uses 4,000 sq/ft|0.556 to A|
||0.444 to B|
Other|Based on direct labor cost|0.500 to A|
||0.500 to B|
|||
From|Product A Cost per unit|Product B Cost per unit|
Direct labor cost|$30.00|$60.00|
Direct materials cost|$10.00|$40.00|
Indirect labor |$14.79|$15.93|
Indirect materials|$9.20|$4.60|
Utilities|$8.35|$7.30|
Rent|$4.31|$6.88|
Other overheads|$2.50|$5.00|
Total cost|$79.15|$139.71|