Answered Essay: QUESTION 1 Smith Phine, Inc. produces running shoes, (1) Standard and (2)ultra During October, the companry experienced above normall production Specfically, 800 pairs of standard shoes were produced, and 200 pairs of ultra shoes were produced. The overhead cost is estimated to be $134,250 A breakdown of the overhead costs reveals the following activiies TOTAL COST 1. Materials handling 2 Equipment setup 3 Inspections Number of requisitions Number of setups Number of inspections 52,500 41,250 0 500 $ 134250 The cost analysts determined the following cost driver volumes for each product as tolows COSTORIVERS Number of requisitdions Number of setups Number of inspections STANDARD 1,500 900 TOTAL 3,600 ULTRA 2.100 1.500 INSTRUCTIONS 1. Compute the overhead rate for each activity 2 Determine the amount of overhead costs that should be assigned to each product 3. Assume instead of ABC. the traditional method of overhead assignment used machine hours to assign overhead costs Total machine hours are approximately 1 200 hours where the production of standard shoes used 800 machine hours and the production of utra shoes used 400 machine hours Determine the amount of overhead cost that would be assigned to each of the two products 4 Compare and evaluate your answer in #2 with your answer in "3. Is one answer a more fair assignment and/or a more accurate assignment than the other? Explain in detal,

QUESTION 1 Smith Phine, Inc. produces running shoes, (1) Standard and (2)ultra During October, the companry experienced above normall production Specfically, 800 pairs of standard shoes were produced, and 200 pairs of ultra shoes were produced. The overhead cost is estimated to be $134,250 A breakdown of the overhead costs reveals the following activiies TOTAL COST 1. Materials handling 2 Equipment setup 3 Inspections Number of requisitions Number of setups Number of inspections 52,500 41,250 0 500 $ 134250 The cost analysts determined the following cost driver volumes for each product as tolows COSTORIVERS Number of requisitdions Number of setups Number of inspections STANDARD 1,500 900 TOTAL 3,600 ULTRA 2.100 1.500 INSTRUCTIONS 1. Compute the overhead rate for each activity 2 Determine the amount of overhead costs that should be assigned to each product 3. Assume instead of ABC. the traditional method of overhead assignment used machine hours to assign overhead costs Total machine hours are approximately 1 200 hours where the production of standard shoes used 800 machine hours and the production of utra shoes used 400 machine hours Determine the amount of overhead cost that would be assigned to each of the two products 4 Compare and evaluate your answer in #2 with your answer in “3. Is one answer a more fair assignment and/or a more accurate assignment than the other? Explain in detal,

Expert Answer

 

Solution 1:

Determination of activity rate for each activity & allocation of overhead and overhead cost per unit
Activity Estimated Overhead Cost Activity Base Usage of Activity Base Activity Rate
Materials handling $52,500.00 Nos of requisitions 3600 $14.58
Equipment Setup $41,250.00 Nos of Setups 2400 $17.19
Inspections $40,500.00 Nos of inspections 2250 $18.00
Total $134,250.00

Solution 2:

Determination of activity rate for each activity & allocation of overhead and overhead cost per unit
Activity Estimated Overhead Cost Activity Base Usage of Activity Base Activity Rate Standard Ultra
Usage Allocated Costs Usage Allocated Costs
Materials handling $52,500.00 Nos of requisitions 3600 $14.58 1500 $21,875.00 2100 $30,625.00
Equipment Setup $41,250.00 Nos of Setups 2400 $17.19 900 $15,468.75 1500 $25,781.25
Inspections $40,500.00 Nos of inspections 2250 $18.00 750 $13,500.00 1500 $27,000.00
Total $134,250.00 $50,843.75 $83,406.25

Solution 3:

Predetermined overhea rate = Total overhead cost / Nos of machine hours = $134,250 / 1200 = $111.875 per machine hour

Overhead cost assigned to standard shoes = 800 * $111.875 = $89,500

Overhead cost assigned to Ultra shoes = 400 * $111.875 = $44,750

Solution 4:

Under ABC overhead cost assigned to standard shoes is lower than overhead cost assigned to Ultra shoes. While under traditional costing overhead cost assigned to standard shoes is higher than overhead cost assigned to Ultra shoes. Under traditional costing overhead cost is assigned to product on single plantwide overhead rate. However under activity based costing overhead costing assigned to different product on the basis of efforts involved in different activities by each product. Therefore assignement overhead cost under ABC represent fair and accurate assignement of overhead cost than overhead cost assignment under traditional costing.

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