Question

b) Electric Car Co (ECC). currently manufactures two different types of fully electronic cars in 2021. Type 8Y is a large SUV whereas Type 8W will be the fastest car in the world with 10 rocket thrusters. ECC has decided to use ABC costing instead of traditional costing. The 2021 budget to manufacture these new types include manufacturing overhead of $126,920,760 which has been allocated on each product’s inspection hours. The expected prime costs of two new types are as follows:

	Type 8Y	Type 8W
Prime costs	$20,915	$43,625

ECC’s controller believes the traditional costing system may be providing misleading cost information. They have developed an analysis of the 2021 budgeted manufacturing-overhead costs shown in the following chart.

Activity	Cost Driver	Budgeted Activity	Budgeted Cost
Assembly	Assembly hours	10,000	$63,460,000
Inspection	Inspection hours	10,000	$27,920,000
Painting	Painting hours	5,000	$22,850,000
Quality control	Number of tests	8,000	$12,690,760
Total manufacturing-overhead cost			$126,920,760

Actual data regarding the 2021 manufacturing of the Type 8Y and the Type 8W is shown in the following table with a total MOH of $216,920,760:

	Type 8Y	Type 8W
Budgeted Sales (units)	2222	555
Assembly hours	767	2955
Inspection hours	767	2955
Paint Gallons	383	1477
Tests	612	2364

Required: 1) Using the traditional method i. Determine the company’s predetermined overhead rate(s) applied ii. Determine how much overhead was applied to Type 8Y iii. Provide the MOH true-up journal entry required for this method at the end of the year 2) Using the ABC method i. Determine the company’s predetermined overhead rate(s) applied ii. Determine how much overhead was applied to Type 8Y iii. Provide the MOH true up journal entry required for this method at the end of the year

Answer 1

Answer :

(1) (i) .

Company's predetermined overhead rates (s) = Budgeted manufacturing overhead cost / Inspection hours

= $126,920,760 / 10,000

= $12,692.076

(1) (ii)

Overhead applied to type 8Y = 767*$12,692.076 = $9,734,822

(1).(iii)

WIP- Type 8Y	$97,34,822	-
Manufacturing overhead	-	$97,34,822

(2) (i).

Activity	Cost driver	Budgeted activity	Budgeted cost	Overhead rate
Assembly	Assembely hours	10000	$6,34,60,000	$6,346
Inspection	Inspection hours	10000	2,79,20,000	$2,792
Paintng	Gallons of paint	5000	2,28,50,000	4,570
Quality control	No.of tests	8000	1,26,90,760	1,586
-	-	Total	$12,69,20,760	-

(2) (ii).

Overhead applied to type 8Y

Acitivity	Activity used	Overhead rate	Cost
Assembly	767	$6,346	$48,67,382
Inspection	767	2,792	21,41,464
Painting	383	4,570	17,50,310
Quality control	612	1,586	9,70,843
Total	-	-	$97,29,999

(2)(iii)

WIP-Type 8Y	$97,29,999	-
Manufacturing overhead	-	$97,29,999