Question:
Jackson Ltd manufactures MARTHA and FRED products. The overhead rate for the entire plant is based on direct labour hours.
FRED MARTHA
Production Quantity 1000 units to 5000 units
Direct material $40 $60
Direct labour 30 ( 2 hours) 45 (3 hours)
Manufacturing overhead 96 ( 2 hours) 144 (3 hours)
Manufacturing overhead can be calculated using a volume-based method using an overhead rate that is based on direct labour hours.
Costs related to machines $450,000
Installation and inspection 180,000
96,000 for plant-related costs
Total $816,000
Jackson currently prices its products at 120% total manufacturing cost. It has also noticed that a rival is producing MARTHA. Jackson’s accountant suggested Activity Based Costing. He provided the following details
Budgeted level for Activity Cost Pool Cost Driver
Machine-related costs Machine hours 9000 Hours
Inspection and setup Number of production runs 40
Costs associated with plant maintenance Square footage 1,920 sq. ft.
These are some additional details about the products:
Each FRED takes 4 hours of machine time, while each MARTHA takes 1 hour.
Each MARTHA is made in 50 units.
FREDs account for three quarters of engineering activity in terms of change orders.
It covers 1,920 square feet, of which 80 percent is used for the production of FREDs.
(a) Calculate FREDs and MARTHAs unit costs using the traditional approach to overhead calculation
(b) Calculate each activity’s cost per activity in the cost pool
Answer to Question: ACC200 Introduction To Management Accounting
Part A
Calculation of the total hours of direct labour
Name of the Product
Hours of total labour
Hours of total labour
Calculation of the predetermined overhead rate per hour
Budgeted manufacturing overhead = $816,000
Total labor hours = 17,000
Predetermined overhead rate = $816,000/17,000 = $48
Calculation of the predetermined overhead rate per unit
Name of the Product
Hours of labour required per unit
Overhead rate predetermined
Calculation of the cost per product using the traditional approach
Particulars
Direct Material
Part B
Calculation of the cost per activity for each activity pool
Activity cost pool
Budgeted Level
Machine-related costs
Hours of operation
9000 hours
Inspection and setup
Production runs
100 Change Orders
Costs related to plants
Space in square footage