Question

Custom Luxury Yatchs (CLY) makes three different styles of personal yachts: Baja; Saria; and Terra. Given that each yacht is significantly different from the others, the company utilizes a job-order costing system to allocate costs to different jobs. CLYs CEO, Sarah, decided that given the process for making the customized yachts was fairly labour intensive, that they would use direct labour hours as the basis for overhead allocation. In December, 2017, Jessica, the controller, estimated the following amounts for the year 2018:

Direct material		$22,265,000
Direct Labour		$198,000,000
Overhead		$110,000,000
Construction Labour Hours (DL)		625,000

Jessica recorded the following actual direct material and direct labour hours for the only three yachts started and completed during the last quarter of 2016:

	Baja	Saria	Terra
Direct Material	$12,500,000	$8,500,000	$15,000,000
Construction Labour Hours	62,000	50,000	68,000

Required

1. Compute the cost of each job using the current system of cost allocation (around to the nearest full dollar).

Answer:

	Baja	Saria	Terra
Direct Material	$ 12,500,000.00	$   8,500,000.00	$ 15,000,000.00
Direct Labor	$ 19,641,600.00	$ 15,840,000.00	$ 21,542,400.00
Overheads	$ 10,912,000.00	$   8,800,000.00	$ 11,968,000.00
Total	$43,053,600.00	$33,140,000.00	$48,510,400.00

Working note:

	Baja	Saria	Terra
Direct Material	12500000	8500000	15000000
Direct Labor	=198000000/625000*62000	=198000000/625000*50000	=198000000/625000*68000
Overheads	=110000000/625000*62000	=110000000/625000*50000	=110000000/625000*68000

2. Custom Luxury Yacht’s Controller, Jessica, recently heard about using an activity-based costing (ABC) system, thus suggested the company use ABC to determine the costs of the three yachts. Jessica was able to break-down the estimated 2018 overhead costs as follows:

Activity	Amount	Activity Measure	Total Activity Level
Planning & Design	$12,000,000	Computer Hours	450,000 Computer Hours
Fabricating	$32,000,000	Machine Hours	505,000 machine hours
Moulding	$21,000,000	Construction Labour Hours	625,000 construction labour hours
Assembly	$42,000,000	Set-Ups	1,540 Set Ups
Testing	$3,000,000	Number of tests	625 tests

Jessica also documented the following consumption of activity by each of the three jobs/yachts (note these are in addition to the construction labour hours consumed by the three jobs.

	Baja	Saria	Terra
Planning & Design Hours	55,000	42,000	62,000
Fabricating Machine Hours	51,000	35,000	64,000
Assembly Set-Ups	280	220	450
Tests	85	65	92

Compute the following

• The activity rates for each of the activities (round to two decimal places)
• Total cost of each job (yachts) using activitybased costing (around to the nearest full dollar amount).

Answer 1

Answer:

a.

Activity	Amount	Total Activity Level	Activity rates
Planning & Design	$ 12,000,000	450,000	$            26.67
Fabricating	$ 32,000,000	505,000	$            63.37
Moulding	$ 21,000,000	625,000	$            33.60
Assembly	$ 42,000,000	1,540	$    27,272.73
Testing	$   3,000,000	625	$       4,800.00

b.

	Baja	Saria	Terra
Direct Material	$ 12,500,000.00	$   8,500,000.00	$ 15,000,000.00
Direct Labor	$ 19,641,600.00	$ 15,840,000.00	$ 21,542,400.00
Overheads	$ 14,825,913.47	$ 11,329,821.78	$ 20,707,906.15
Total	$ 46,967,513.47	$ 35,669,821.78	$ 57,250,306.15

Working Note:

		Activity pool			Overheads
	Activity rates	Baja	Saria	Terra	Baja	Saria	Terra
Planning & Design Hours	$         26.67	55,000	42,000	62,000	$   1,466,666.67	$   1,120,000.00	$   1,653,333.33
Fabricating Machine Hours	$         63.37	51,000	35,000	64,000	$   3,231,683.17	$   2,217,821.78	$   4,055,445.54
Moulding	$         33.60	62,000	50,000	68,000	$   2,083,200.00	$   1,680,000.00	$   2,284,800.00
Assembly Set-Ups	$ 27,272.73	280	220	450	$   7,636,363.64	$   6,000,000.00	$ 12,272,727.27
Tests	$    4,800.00	85	65	92	$      408,000.00	$      312,000.00	$      441,600.00
Total					$ 14,825,913.47	$ 11,329,821.78	$ 20,707,906.15

In case of any doubt, please comment.