Module+17000+III+Explanation+and+Examples

III. Module 17000 Explanation and Examples wc

Example 1

Manteca, Inc produces two types of speakers: deluxe and regular. Manteca uses a plant-wide rate based on direct labor hours to assign its overhead costs. The company has the following estimated and actual data for the coming year.

Estimated overhead $750,000

Expected Activity 25,000

Actual activity (direct labor hours)

Deluxe speaker 5,000

Regular Speaker 20,000

Units Produced

Deluxe speaker 10,000

Regular speaker 100,000


 * 1) Calculate the predetermined plantwide overhead rate and the applied overhead for each product, using direct labor hours.


 * Plant rate = estimated overhead/ expected activity ||
 * = || $ 750,000 || / ||  25,000 ||
 * = || $ 30 || per hour ||  ||
 * applied overhead ||  ||   ||
 * deluxe = || rate || x || deluxe units ||
 * = || $ 30 || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">x || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;"> 5,000 ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || **<span style="font-family: 'Arial','sans-serif'; font-size: 13px;">$ 150,000 ** ||  ||   ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">regular = || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">rate || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">x || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">regular units ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">$ 30 || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">x || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;"> 20,000 ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || **<span style="font-family: 'Arial','sans-serif'; font-size: 13px;">$ 600,000 ** ||  ||   ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">$ 30 || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">x || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;"> 20,000 ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || **<span style="font-family: 'Arial','sans-serif'; font-size: 13px;">$ 600,000 ** ||  ||   ||

2. Calculate the overhead cost per unit for each product.


 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">overhead per deluxe unit = || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">$ 150,000 || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">/ || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;"> 10,000 ||
 * ||  || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || **<span style="font-family: 'Arial','sans-serif'; font-size: 13px;">$ 15 ** ||   ||   ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">overhead per regular unti = || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">$ 600,000 || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">/ || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;"> 100,000 ||
 * ||  || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || **<span style="font-family: 'Arial','sans-serif'; font-size: 13px;">$ 6 ** ||   ||   ||
 * ||  || <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">= || **<span style="font-family: 'Arial','sans-serif'; font-size: 13px;">$ 6 ** ||   ||   ||

3. What if the deluxe product used 10,000 hours instead of 5,000 hours? Calculate the effect on the profitability of this product line if all 10,000 units are sold, and then discuss the implications of this outcome.


 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">$30 x 5000 ||  ||   ||
 * <span style="font-family: Arial,sans-serif; font-size: 13px; line-height: normal; margin-bottom: 0pt; margin-left: 0in; margin-right: 0in; margin-top: 0in; text-indent: 0in;">There would be an increase of $150,000 of overhead assigned to deluxe so profitability would decrease by this amount as well.Overhead affect product cost and profitability and can affect tons of decisions. This show that the way overhead is assigned then it is important. ||

Example 2 Larsen, Inc. produces two types of electronics parts and has provided this data: X12 YK7 Total Units produced 100,000 600,000 - Direct Labor Hours 30,000 70,000 100,000 Machine Hours 50,000 300,000 350,000 Number of Setups 40 80 120 Testing Hours 1,000 9,000 10,000 Number of Purchase Orders 500 3,500 4,000 <span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">There are four activities: Machining, Setting up, Testing, and Purchasing <span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">1) Calculate the activity consumption ratios fpr each product.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">2) Calculate the consumption ratios for plantwide. When compared with the activity ratios, what can you say about the relative accuracy of a plantwide rate? Which product is undercosted?
 * Overhead Activity|| x12 || yk7 || Driver ||  ||   ||
 * Machining ||  || 0.14285714 || 0.857143 |||| machine hours || a ||
 * Setups ||  || 0.33333333 || 0.666667 |||| number of setups || b ||
 * Inspecting products || 0.1 || 0.9 |||| testing hours || c ||
 * purchasing ||  || 0.125 || 0.875 |||| purchase orders || d ||
 * 50,000 || / || 350,000 || a X17 ||  ||   ||   ||
 * 300,000 || / || 350,000 || a YK7 ||  ||   ||   ||
 * 40 || / || 120 || b X17 ||  ||   ||   ||
 * 80 || / || 120 || b YK7 ||  ||   ||   ||
 * 1,000 || / || 10,000 || c X17 ||  ||   ||   ||
 * 9,000 || / || 10,000 || c YK7 ||  ||   ||   ||
 * 500 || / || 4,000 || d X12 ||  ||   ||   ||
 * 3,500 || / || 4,000 || d YK7 ||  ||   ||   ||
 * 9,000 || / || 10,000 || c YK7 ||  ||   ||   ||
 * 500 || / || 4,000 || d X12 ||  ||   ||   ||
 * 3,500 || / || 4,000 || d YK7 ||  ||   ||   ||
 * 3,500 || / || 4,000 || d YK7 ||  ||   ||   ||


 * Overhead Activity|| x12 || yk7 || Driver ||
 * Manufacturing || 0.3 || 0.7 || Direct labor hours ||
 * 30,000 || / || 100,000 || x12 ||  ||
 * 70,000 || / || 100,000 || yk7 ||  ||
 * 70,000 || / || 100,000 || yk7 ||  ||

The plantwide rate is undercosting yk7 and overcosting x12. This is evident because the .3 consumption ratio is higher than all but the setup consumption ratio for x12.

3) What if the machine hours were used for the plantwide rate? Would this remove the cost distortion of a plantwide rate?


 * Overhead Activity|| x12 || yk7 || Driver ||
 * Manufacturing || 0.14285714 || 0.857143 || machine hours ||
 * 50000 || / || 350000 || x12 ||  ||
 * 300000 || / || 350000 || yk7 ||  ||
 * 300000 || / || 350000 || yk7 ||  ||

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">This would likely make all of the assignments better because the almost all of x12's activites has a ratio close to .14. The only way to tell that the cost assignment of machine hours was more more confident would be if the activity rates were equal.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">Example 3 <span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">Cornell Company produces two lawn mowers: basic and self propelled. The company has four activities: machining, engineering, receiving, and packing.The following information is given.

Basic Self Propelled Total

Units Produced 250,000 750,000 -

Prime Costs $20,000,000 $75,000,000 $95,000,000

Machine Hours 250,000 1,250,000 1,500,000

Engineering hours 1,000 9,000 10,000

Receiving orders 1,000 3,000 4,000

Inspection hours 2,000 4,000 6,000

Overhead costs: Machining $15,000,000

Engineering 5,000,000

Receiving 1,400,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;"> Inspecting products 900,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">1) Calculate the four activity rates.


 * Machining rate =|| 15000000 || / || 1500000 || = || $ 10 ||
 * Engineering rate = || 5000000 || / || 10000 || = || $ 500 ||
 * Receiving rate = || 1400000 || / || 4000 || = || $ 350 ||
 * Inspecting rate = || 900000 || / || 6000 || = || $ 150 ||

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">2) Calculate the unit costs using activity rates. Also, calculate the overhead cost per unit.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">To calculate the overhead cost per unit you must first calculate the prime cost per unit:
 * Prime costs|| $ 20,000,000 || $ 75,000,000 ||
 * Machining ||  ||   ||
 * 10 x 250000 || $ 2,500,000 ||  ||
 * 10 x 1250000 ||  || $ 12,500,000 ||
 * engineering ||  ||   ||
 * 500 x 1000 || $ 500,000 ||  ||
 * 500 x 9000 ||  || $ 4,500,000 ||
 * receiving ||  ||   ||   ||
 * 350 x 1000 || $ 350,000 ||  ||
 * 350 x 3000 ||  || $ 1,050,000 ||
 * inspecting products ||  ||   ||
 * 150 x 2000 || $ 300,000 ||  ||
 * 150 x 4000 ||  || 600000 ||
 * Total Manufacturing costs || $ 23,650,000 || $ 93,650,000 ||
 * Units of production || 250,000 || 750,000 ||
 * Unit cost ||  || $ 94.60 || $ 124.87 ||

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;"> Now you can calculate the overhead cost per unit:
 * x12 =|| 20000000 || / || 250000 || = || $ 80 ||
 * yk7 || 75000000 || / || 750000 || = || $ 100 ||

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 200%;">3) What if consumption ratios instead of activity rates were used to assign costs instead of activity rates? Show the cost assignment for the inspection activity.
 * Overhead per unit for x12|| 94.6 || - || 80 || = || $ 14.60 ||
 * overhead per unit for yk7 || 124.87 || - || 100 || = || $ 24.87 ||


 * Consumption ratios will yield exactly the same overhead as activity rates.||
 * If the actual usage is the same as the expected usage. ||
 * The consumption ratio is 2000/6000 or 1/3 for x12 and 2/3 for yk7. ||
 * This makes the assignment (1/3) x900000 for 300000 for x12 and (2/3) x 900000 for 600000 for yk7 which is the same assignment obtained using activity rates. ||