Problem 1: Allocating Unit-Level, Batch-Level, and Product Line Manufacturing, Overhead Costs, Solar Salt Company has two divisions. Gross margin computations for these two divisions for 2006 are given below.
Agricultural Products Retail Products
Sales . . . . . . . . . . . .. ... . $1,600,000 $900,000
Direct materials . . . . . . . . . (100,000) (50,000)
Direct labor . . . . . . . . . . . . (900,000) (500,000)
Manufacturing O.Head* . . . (450,000) (250,000)
Gross margin . . . . . . . . . .. $150,000 $100,000
*Manufacturing overhead is allocated to production based on the amount of direct labor cost.
Solar Salt has determined that its total manufacturing overhead cost of $700,000 is a mixture of unit-level costs, batch-level costs, and product line costs. Solar Salt has assembled the following information concerning the manufacturing overhead costs, the annual number of units produced, production batches, and number of product lines in each division:
Total Mfg. Overhead Costs Agricultural Products Retail Products
Unit-level overhead . . $210,000 13,500 units 7,500 units
Batch-level overhead . . 280,000 90 batches 50 batches
Product line overhead . . 210,000 18 lines 10 lines
$700,000
Activity-Based Costing and Quality Management
Required to do:
Question 1. Prepare gross margin calculations for Solar Salt's two divisions assuming that manufacturing overhead is allocated based on the number of units, number of batches, and number of product lines.
Question 2. Comment on the comparison between the original overhead allocation done using direct labor cost and the manufacturing overhead allocation done in part (1).
Question 3. Repeat part (1), assuming the following information concerning the number of units, batches, and product lines in each division.
Total Mfg. Overhead Costs Agricultural Products Retail Products
Unit-level overhead . . . $210,000 13,500 units 7,500 units
Batch-level overhead . . 280,000 50 batches 90 batches
Product line overhead . . 210,000 10 lines 18 lines
$700,000
Question 4: Identifying and Using Volume-Based and Activity-Based Cost Allocation Rates.
Rane Company produces electronic fish finders. It makes two different fish finders: the standard model, which is produced in bulk and sells for $150, and the deluxe model, which comes in various configurations and sells for $300. Rane's engineering and design overhead cost for 2006 is $60,000. The following information relates to production in 2006:
Number of different machine setups needed for a standard model production run . . . . .. 4
Number of different machine setups needed for a deluxe model production run . . . . . . .11
Number of standard fish finders produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22,000
Number of deluxe fish finders produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Number of engineering design changes needed on the standard model . . . . . . . . . .. 6
Number of engineering design changes needed on the deluxe model . . . . . . . . . . . .. 2
Average batch size per production run for standard model . . . . . . . . . . . . . . . . . . . . . 400
Average batch size per production run for deluxe model . . . . . . . . . . . . . . . . . . . . .. . 200
Required to do:
Question 1. Determine the engineering and design costs to be assigned to standard and deluxe fish finders using the following allocation methods:
a. Number of units produced
b. Number of setups required
c. Number of engineering design changes needed
Question 2. Which allocation method do you believe is more equitable?