Calculate the overhead rate based on traditional overhead Calculate the overhead rate based on traditional overhead allocation with direct labor hours as the base. Determine the total cost to produce one unit of each product. (Use the overhead rate calculated in question 1.) Calculate the overhead rate for each activity center based on the activity-based costing techniques. Determine the total cost to produce one unit of each product. Use the overhead rates calculated in question 3.
Explain why overhead cost shifted from the high-volume product to the low-volume product under activity based costing. Discuss the concept of cross subsidies between products as it applies in this case.
The requirements above are required to be answered in a business memo format. Grading will be based upon the answers calculated for each question, spelling, and business grammar and language tense.
For the business memo, please input only the final answer arrived at when the requirement requires a calculation.(For example, requirement 1 requires you to calculate the overrate rate based on traditional overhead allocation with direct labor hours as the base.) In a separate document (such as excel or word), please provide the support calculations for how you arrived at (1) the overrate rate for requirement 1, (2) the total cost to produce one unit of product for requirement 2, (3) the overrate rate for each activity center for requirement 3, and (4) total cost for requirement 4.
Big Surf Company manufactures surfboards. The company produces two models: the small board and the big board. Data regarding the two boards are as follows:
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Product
|
Direct Labor Hours per Unit
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Annual Production
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Total Direct Labor Hours
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|
Big Board
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1.5 hours
|
10,000 boards
|
15,000 hours
|
|
Small Board
|
1.0 hour
|
35,000 boards
|
35,000 hours
|
The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labor rate of $13 per hour. The company has historically used direct labor hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1,664,000 per year. The big board is more complex to manufacture than the small board because it requires more machine time. You in the role of the company's controller are considering the use of activity-based costing to apply overhead because the surfboards require such different amounts of machining. You have identified the following four separate activity centers.
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|
Volume of Annual Activity
|
|
Activity Center
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Cost Driver
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Traceable Costs
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Big Board
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Small Board
|
|
Machine Set up
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Number of Setups
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$100,000
|
100
|
100
|
|
Special Design
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Design Hours
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$364,000
|
900
|
100
|
|
Production
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Direct Labor Hours
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$900,000
|
15,000
|
35,000
|
|
Machining
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Machine Hours
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$300,000
|
9,000
|
1,000
|