Drill Master Corp. produces two products: saws and drills. Three activities are used in their manufacture. These activities and their associated costs and bases are as follows: Activity Budgeted Costs Activity Base Stamping $200,000 Machine hours Assembly 400,000 Labor hours Setup 36,000 Number of setups Activity Base Saws Drills Total Machine hours 1,000 3,000 4,000 Labor hours 10,000 20,000 30,000 Number of setups 6 12 18 Units produced 500 600 a. Determine the activity rate for each activity. b. Determine the factory overhead to be allocated to EACH unit of product. Round to the nearest cent. Show work!!
Cost allocation is a crucial aspect of managerial accounting that enables companies to assign overhead costs to their products accurately. Drill Master Corp., a company that produces saws and drills, uses three primary activities in their manufacturing process: Stamping, Assembly, and Setup. In this essay, we will determine the activity rates for each of these activities and calculate the factory overhead to be allocated to each unit of product. This process helps the company understand the true cost of producing its saws and drills.
To allocate overhead costs to products, we first need to determine the activity rates for each of the three activities. The activity rate is calculated by dividing the budgeted cost of each activity by its respective activity base.
Stamping Activity Rate
Budgeted Cost for Stamping: $200,000
Activity Base for Stamping: Machine hours (4,000)
Activity Rate for Stamping = Budgeted Cost / Activity Base Activity Rate for Stamping = $200,000 / 4,000 machine hours Activity Rate for Stamping = $50 per machine hour
Assembly Activity Rate
Budgeted Cost for Assembly: $400,000
Activity Base for Assembly: Labor hours (30,000)
Activity Rate for Assembly = Budgeted Cost / Activity Base Activity Rate for Assembly = $400,000 / 30,000 labor hours Activity Rate for Assembly = $13.33 per labor hour
Setup Activity Rate
Budgeted Cost for Setup: $36,000
Activity Base for Setup: Number of setups (18)
Activity Rate for Setup = Budgeted Cost / Activity Base Activity Rate for Setup = $36,000 / 18 setups Activity Rate for Setup = $2,000 per setup
With the activity rates calculated, we can now determine the factory overhead to be allocated to each unit of product. To do this, we need to consider the actual consumption of each activity by the products. The data provided shows the number of setups, machine hours, and labor hours used by the saws and drills:
Saws:
Machine hours: 1,000
Labor hours: 10,000
Number of setups: 6
Drills:
Machine hours: 3,000
Labor hours: 20,000
Number of setups: 12
Now, we can calculate the factory overhead for each product:
Factory Overhead for Saws
Factory Overhead for Saws = (Machine hours for Saws x Activity Rate for Stamping) + (Labor hours for Saws x Activity Rate for Assembly) + (Number of setups for Saws x Activity Rate for Setup) Factory Overhead for Saws = (1,000 machine hours x $50 per machine hour) + (10,000 labor hours x $13.33 per labor hour) + (6 setups x $2,000 per setup) Factory Overhead for Saws = $50,000 + $133,300 + $12,000 Factory Overhead for Saws = $195,300
Factory Overhead for Drills
Factory Overhead for Drills = (Machine hours for Drills x Activity Rate for Stamping) + (Labor hours for Drills x Activity Rate for Assembly) + (Number of setups for Drills x Activity Rate for Setup) Factory Overhead for Drills = (3,000 machine hours x $50 per machine hour) + (20,000 labor hours x $13.33 per labor hour) + (12 setups x $2,000 per setup) Factory Overhead for Drills = $150,000 + $266,600 + $24,000 Factory Overhead for Drills = $440,600
In conclusion, Drill Master Corp. has successfully determined the activity rates for its three key manufacturing activities: Stamping, Assembly, and Setup. These activity rates are vital for allocating factory overhead costs to each unit of product. The factory overhead allocated to each unit of Saws is $195,300, while the factory overhead allocated to each unit of Drills is $440,600. This precise allocation of costs enables the company to make informed decisions about pricing, cost control, and product profitability.
Cost allocation is an essential tool for businesses to enhance their financial transparency and ultimately improve their overall financial performance and decision-making processes.
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