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Category > Accounting Posted 02 May 2017 My Price 10.00

Allocating costs with different cost drivers

 

Allocating costs with different cost drivers

Cray Sporting Goods, Inc., produces indoor treadmills. The company allocates its overhead costs using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow.

Activities

Unit Level

Batch Level

Product Level

Facility Level

Cost

$1,000,000

$500,000

$300,000

$900,000

Cost driver

12,500 labor hours

50 setups

Percentage of use

15,000 units

Producing 5,000 units of PFT200, one of the company’s five products, took 4,000 labor hours, 25 setups, and consumed 30 percent of the product-sustaining activities.

 

Required

a. Had the company used labor hours as a companywide allocation base, how much overhead would

it have allocated to the 5,000 units of PFT200?

b. How much overhead is allocated to the 5,000 PFT200 units using activity-based costing?

c. Compute the overhead cost per unit for PFT200 using activity-based costing and direct labor hours

if 5,000 units are produced. If direct product costs are $337 and PFT200 is priced at 20 percent above cost (rounded to the nearest whole dollar), compute the product’s selling price under each allocation system.

d. Assuming that activity-based costing provides a more accurate estimate of cost, indicate whether

PFT200 would be over- or underpriced if Cray uses direct labor hours as the allocation base.

Explain how over- or undercosting can affect Cray’s profitability.

e. Comment on the validity of using the allocated facility-level cost in the pricing decision. Should other costs be considered in a cost-plus pricing decision? If so, which ones? What costs would you include if you were trying to decide whether to accept a special order?

 

 
 

Answers

Alpha Geek
(8)
Status NEW Posted 02 May 2017 10:05 AM My Price 10.00

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file 1493720331-answer1.docx preview (857 words )
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