Author Question: Capital represents the owner's investment, or equity, in a business. Indicate whether the ... (Read 58 times)

lb_gilbert · **on:** Jul 6, 2018

Capital represents the owner's investment, or equity, in a business.
Indicate whether the statement is true or false

Question 2

First stage allocation, activity-based costing, manufacturing sector.

Thurgood Devices uses activity-based costing to allocate overhead costs to customer orders for pricing purposes. Many customer orders are won through competitive bidding. Direct material and direct manufacturing labor costs are traced directly to each order. Thurgood's direct manufacturing labor rate is 20 per hour. The company reports the following yearly overhead costs:

Thurgood has established four activity cost pools:

Only about 20 of Thurgood's yearly orders require custom designs.
Paul Moeller, Thurgood's controller, has prepared the following estimates for distribution of the over- head costs across the four activity cost pools:

Order 448200 required 4,550 of direct materials, 80 direct manufacturing labor-hours, and one custom design.

Required:
1. Allocate the overhead costs to each activity cost pool. Calculate the activity rate for each pool.
2. Determine the cost of Order 448200.
3. How does activity-based costing enhance Thurgood's ability to price its orders? Suppose Thurgood used a traditional costing system to allocate all overhead costs to orders on the basis of direct manufacturing labor-hours. How might this have affected Thurgood's pricing decisions?

jennafosdick · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

T

Answer to Question 2

1.
Direct Manuf. Labor Support Order Processing Design Support Other Total
Wages and salaries 192,000 120,000 144,000 24,000 480,000
Depreciation 15,000 6,000 9,000 30,000 60,000
Rent 36,000 30,000 12,000 42,000 120,000
Other overhead 48,000 72,000 84,000 36,000 240,000
Total 291,000 228,000 249,000 132,000 900,000

Cost Allocation Base Allocation Rate
Direct Manuf. Labor Support 291,000 30,000 DMLHs 9.70/DMLH
Order Processing 228,000 500 orders 456/order
Design Support
Other 249,000
132,000 100 custom designs
30,000 DMLHs 2,490/custom design
4.40/DMLH

2.
Direct materials 4,550
Direct manuf. labor (80 hrs. 20/hr.) 1,600
Direct manuf. labor support (80 dir. manuf. lbr-hrs. 9.70/hr.) 776
Order processing (1 order 456/order) 456
Design support (1 custom design 2,490/custom design)
Other overhead (80 dir. manuf. lbr-hrs. 4.40/hr.) 2,490
352
Total overhead costs 10,224

3. Because only about 20 of the orders that Thurgood receives require custom designs, it is important that the costs generated by custom designs are not allocated to non-custom orders. Activity-based costing allows Thurgood to only assign resources used by orders to the orders. Similarly, order processing costs of 456/order are assigned to each order, regardless of the size of the order. Activity-based costing leads to more accurate costing of orders. This, in turn, leads to more competitive pricing. If Thurgood allocated all overhead costs to orders on the basis of direct manufacturing labor hours, they would tend to overprice larger, non-custom orders and underprice smaller, custom orders. They would likely lose bids on the overpriced orders and win the underpriced orders, but then lose money on the bids they won because the actual costs would be much greater than the estimated costs. The underpriced bids have small direct manufacturing labor hours relative to the resources needed to support custom designs and order processing costs for small orders.