Question

Question 1: Cost allocation Product A Product B Total sales volume (units) 180 100 280 Revenue...

Question 1: Cost allocation

Product A Product B Total
sales volume (units) 180 100 280
Revenue $1,000 $6,000 $7,000
Variable costs:
  direct materials $200 $400 $600
  direct labor $400 $1,000 $1,400
Contribution margin $400 $4,600 $5,000
  Fixed costs $4,200
Profit $800


a) Allocate the fixed costs between products A and B. Use direct labor dollars as the cost driver.
allocation rate=$   per DL$
allocated costs for A=$   
allocated costs for B=$   

b) Compute the profit margins for products A and B:
profit margin for A=$   
profit margin for B=$   
Enter negative numbers with a minus sign, i.e., a loss of $1,000 should be entered as -1000, not as (1000) or ($1000).

c) Should you drop product A or product B in the short term? Why?

Keep both products -- both have positive contribution margin

Drop product A -- it has negative profit margin      

Drop product A -- it has negative contribution margin

Drop product A -- it has smaller contribution margin than product B

Should you drop product A or product B in the long term? Why?

Keep both products -- both have positive contribution margin

Drop product A -- it has negative profit margin      

Drop product A -- it has negative contribution margin

Drop product A -- it has smaller contribution margin than product B

d) If you drop product A in the short term,
    fixed costs will:  

remain the same

decrease by $1,200

    profit will:

decrease by $400

increase by $800


If you drop product A in the long term,
    fixed costs will:

remain the same

decrease by $1,200


    profit will:

decrease by $400

increase by $800


e) Allocate the fixed costs between products A and B, using the number of units as the cost driver.
allocation rate=$   per unit
allocated costs for A=$   
allocated costs for B=$   
These allocated amounts are very different from what you got in part (a). In general, should we use the allocated costs from part (a) or from part (e)? Why?

use the allocated costs from (a) -- direct labor is always a better cost driver than the number of units

use the allocated costs from (e) -- the number of units is always a better cost driver than direct labor     

it depends -- direct labor can be a better cost driver in some situations, and the number of units (or some other activity measure) can be a better cost driver in other situations

f) Suppose that a firm uses a labor-intensive production process. The most reasonable cost driver for manufacturing overhead costs is:

number of units

machine hours

direct labor (measured in hours or dollars)

Suppose that a firm uses a machine-intensive production process. The most reasonable cost driver for manufacturing overhead costs is:

number of units

machine hours     

direct labor (measured in hours or dollars)

g) Suppose that a firm uses a machine-intensive process to make the components for the finished product and then uses a labor-intensive process to assemble the finished product. The firm wants to implement a refined cost allocation with two cost pools:
Pool 1: overhead costs related to the production of components (e.g., machine depreciation, rent for the factory building used to make the components, salaries of machine maintenance staff)
Pool 2: overhead costs related to the assembly of the finished product (e.g., depreciation on tools used by assembly workers, rent for the factory building used for assembly, salaries of labor supervisors)
The most reasonable cost drivers for the two pools are:

direct labor hours or dollars for both pools

machine-hours for pool 1 and direct labor hours or dollars for pool 2     

number of units for pool 1 and number of workers for pool 2

machine hours for both pools

Homework Answers

Answer #1

Answer Answer (c ) - In the short run both the products can be produced and sold because both have positive contribution margin.

- But in the long run Product A should be dropped because it has negative profit margin.

Answer (d) If product A is dropped in the long run, then

- Fixed cost will remain the same and charged fully to Product B cost

- The profit will decrease by $400

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Cost allocation Product A Product B Total sales volume (units) 360 200 560 Revenue $4,000 $24,000...
Cost allocation Product A Product B Total sales volume (units) 360 200 560 Revenue $4,000 $24,000 $28,000 Variable costs:   direct materials $800 $1,600 $2,400   direct labor $1,600 $4,000 $5,600 Contribution margin $1,600 $18,400 $20,000   Fixed costs $16,800 Profit $3,200 a) Allocate the fixed costs between products A and B. Use direct labor dollars as the cost driver. allocation rate=$  per ___________ DL$ allocated costs for A=$ __________ allocated costs for B=$ ___________ b) Compute the profit margins for products A and...
Use the following statement: Product A Product B Total sales volume (units) 100 180 280 Revenue...
Use the following statement: Product A Product B Total sales volume (units) 100 180 280 Revenue $12,000 $72,000 $84,000 COGS: direct materials $2,400 $4,800 $7,200 direct labor $4,800 $12,000 $16,800 MOH $50,400 Gross margin $9,600 Required: (a) allocate the shared MOH ($50,400) among product A and product B, using direct labor dollars as the allocation base. overhead rate=$  per DL$ MOH allocated to A=$ MOH allocated to B=$ (b) using the allocated costs from (a), compute the gross margin for product...
Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The...
Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $748,800 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z: Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity Machining Machine-hours $ 206,000 10,000...
Lenoir Company manufactures two products—28,000 units of Product D and 12,000 units of Product R. The...
Lenoir Company manufactures two products—28,000 units of Product D and 12,000 units of Product R. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products D and R: Activity Cost Pool Activity Measure        Estimated Overhead Cost Expected Activity Machining. . . . ....
Assume a company produces and sells only two products—14,000 units of Product A and 6,000 units...
Assume a company produces and sells only two products—14,000 units of Product A and 6,000 units of Product B. The selling prices are $65 per unit for Product A and $96 per unit for Product B. Product A’s direct materials and direct labor costs per unit are $32 and $12, respectively. Product B’s direct materials and direct labor costs per unit are $34 and $15, respectively. The company is considering implementing an activity-based costing (ABC) system that allocates all of...
Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The...
Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $732,100 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z: Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity Machining Machine-hours $ 209,000 10,000...
Greenwood Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The...
Greenwood Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:    Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity   Machining Machine-hours $ 200,000   ...
Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 1,000...
Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 1,000 units of Product A and 800 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.8 direct labor-hours per unit and Product B requires 0.5 direct labor-hours per unit. The total estimated overhead for next period is $125,320. The company is considering switching to an activity-based costing system for...
Hickory Company manufactures two products—13,000 units of Product Y and 5,000 units of Product Z. The...
Hickory Company manufactures two products—13,000 units of Product Y and 5,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $745,200 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z: Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity Machining Machine-hours $ 242,400 12,000...
Vieth Corporation has an activity-based costing system with three activity cost pools-Processing, Setting Up, and Other....
Vieth Corporation has an activity-based costing system with three activity cost pools-Processing, Setting Up, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT