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PB9.
LO 6.4Casey’s Kitchens makes two types of food smokers: Gas and Electric. The company expects to manufacture 20,000 units of Gas smokers, which have a per-unit direct material cost of $15 and a per-unit direct labor cost of $25. It also expects to manufacture 50,000 units of Electric smokers, which have a per-unit material cost of $20 and a per-unit direct labor cost of $45. Historically, it has used the traditional allocation method and applied overhead at a rate of $125 per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is as follows:



The cost driver for each cost pool and its expected activity is as follows:




What is the per-unit cost for each product under the traditional allocation method?
What is the per-unit cost for each product under ABC costing?
Compared to ABC costing, was each product’s overhead under- or overapplied?
How much was overhead under- or overapplied for each product?

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Answer:

Per unit cost under traditional allocation method

                                                 Gas smoker     Electric smoker

Direct material cost                         15                      20

Direct labour cost                            25                      45  

Overhead applied @ $125/hr         281.25               262.50

Per unit cost                                   321.25                327.50

Overhead applied:

Gas smoker = $125 x 45,000 hours

                              20,000 units

                     = $281.25

Electric smoker = $125 x 105,000 hours

                                     50,000 units

                           = $262.50

Per unit cost using ABC

                                                    Gas smoker     Electric smoker

Direct material cost                         15                      20

Direct labour cost                            25                      45  

Overhead applied:

Machine set-up                                0.10                    0.06                                            

Machine processing                         90                      84

Material requisition                          0.9                     0.14

Per unit cost                                      131                   149.20  

Calculation of cost driver rates

Machine set-up = $5,000/250 set-ups = $20 per unit

Machine processing = $6,000,000/150,000 hrs = $40 per machine hour

Material requisitions = $25,000/500 parts = $50 per part

Calculation of overhead applied

Machine set up

Gas smoker = $20 x 100

                        20,000 units  

                    = $0.10 per unit

Electric smoker = $20 x 150

                              50,000 units

                           =  $0.06

Machine processing  

Gas smoker = $40 x 45,000 machine hours

                          20,000 units

                     = $90 per unit

Electric smoker = $40 x 105,000 machine hours

                                 50,000 units

                           = $84

Material requisition

Gas smoker =  $50 x 360 parts

                         20,000 units

                     = $0.9 per unit

Electric smoker = $50 x 140 parts

                              50,000 units

                           = $0.14 per unit                                                     Traditional allocation method is over-absorbed by $190.25 for Gas smoker and $78.30 for Electric smoker. The over-absorption is the difference between the overhead absorbed                in each method.                                                                                                                                                                                                                                                                                                                                                  

Explanation:

In traditional allocation method, per unit cost is calculated by adding the direct material cost, direct labour cost and overhead applied. Overhead applied is calculated by multiplying the overhead rate given by machine hours for each product divided by the number of units.

In activity-based allocation method, per unit cost is the aggregate of direct material cost, direct labour cost and overhead applied for each cost pool. The cost driver rate is obtained by dividing the overhead for each cost pool by the total cost driver. Then, we will multiply the cost driver rate by the cost driver for each product divided by the number of units in order to derive the overhead applied.

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