Question

Exercise 5.22 a-b

Perdon Corporation manufactures safes—large mobile safes and large walk-in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The information shown below relates to overhead.

		Mobile Safes			Walk-In Safes
Units planned for production		250			50
Material moves per product line		400			220
Purchase orders per product line		450			150
Direct labour hours per product line		500			1,600

The total estimated manufacturing overhead was $214,200. Under traditional costing (which assigns overhead on the basis of direct labour hours), what amount of manufacturing overhead costs are assigned to: (Round answers to 2 decimal places, e.g. 15.25.)

		1. One mobile safe		2. One walk-in safe
Manufacturing overhead		$ each		$ each

The total estimated manufacturing overhead of $214,200 was composed of $186,000 for material handling costs and $28,200 for purchasing activity costs. Under activity-based costing (ABC): (Round answers to 2 decimal places, e.g. 15.25.)

1. What amount of material handling costs are assigned to:

		a. One mobile safe		b. One walk-in safe
Material handling costs		$ each		$ each

2. What amount of purchasing activity costs are assigned to:

		a. One mobile safe		b. One walk-in safe
Purchasing activity costs		$ each		$ each

Answer 1

Traditional costing:

Predetermined manufacturing overhead rate = Total estimated manufacturing overhead/Total direct labor hours = $214200/(500 + 1600) = $214200/2100 = $102 per direct labor hour

	1. One mobile safe	2. One walk-in safe
Manufacturing overhead	$204 each	$3264 each
	(500 x $102)/250	(1600 x $102)/50

Activity-based costing:

Allocation rate for:

Material handling costs: $186000/(400 + 220) = $186000/620 = $300 per move

Purchasing activity costs: $28200/(450 + 150) = $28200/600 = $47 per purchase order

1.

	1. One mobile safe	2. One walk-in safe
Material handling costs	$480 each	$1320 each
	(400 x $300)/250	(220 x $300)/50

2.

	1. One mobile safe	2. One walk-in safe
Purchasing activity costs	$84.60 each	$141 each
	(450 x $47)/250	(150 x $47)/50