Accounting-There are two questions and two problems

| January 30, 2017

Question
There are two questions and two problems.
Questions
1. Why are overhead costs allocated to products, individual jobs or services and not traced
direct to products, individual jobs or services as direct materials and direct labor are?

2. What are three common methods of assigning overhead costs to a product, job or service?

P2.
Ray R. Inc manufactures closed circuit security cameras. The company has budgeted
manufacturing overhead costs for the year as follows:
Type of Cost by Cost Pool
Electric power
Inspections & Testing Costs
Total Manufacturing Overhead

Budgeted Overhead
$250,000
150,000
$400,000

Under a traditional or single plant-wide cost system, the company uses machine hours to allocate
the total plant-wide overhead above. The company had estimated that its production activities
would require 1,000 machine hours for the same year. (Hint: Use this data for part 1).
The company is considering changing to an activity based costing (ABC) system. As part of it
consideration of the new costing system, the company has developed the following estimates for
the current upcoming year:
Type of Cost
Electric power for plant
Inspections & Testing
(Hint: Use this data for part 2).

Activity Based Cost Drivers
50,000 kilowatt hours (KWH)
1,000 inspections (INSP)

The following information related to the production of 200 units of one of its security camera
models.
Direct materials
Direct labor costs

$50,000
$75,000

Actual machine hours
Direct labor hours
Actual Electric power in kilowatt hours
Actual number of inspections

70
5,000
6,000
10

Part 1. Calculate the total cost of the 200 units produced and the cost per camera (per unit)
assuming the company will allocate overhead to this batch of cameras using a plant-wide cost
system. Use the template below. Hint: You will need to first calculate the company’s plant-wide
predetermined overhead rate than allocate a portion of the total overhead to this particular batch
of cameras that were produced. You must show your work to receive credit.
Check figure: Cost per unit is more than $740 but less than $780.

Overhead Rate per MH

$__________

Cost of 200 units produced:
Direct materials
Direct labor
Applied overhead
—————Total Cost
=========

Calculated Cost per unit

$__________

Part 2. Calculate the total cost of the 200 units produced and the cost per camera (per unit)
assuming the company will allocate overhead using an activity based costing (ABC) system. Use
the template below. Hint: You will need to first calculate the company’s overhead rates for the
two separate cost pools than allocate a portion of each cost pool to this particular batch of
cameras that were produced. You must show your work to receive credit.
Check figure: Cost per unit is more than $775 but less than $790.

Electric power overhead rate (per KWH)

$__________

Inspection cost overhead rate (per INSP)

$__________

Cost of 200 units produced:
Direct materials
Direct labor
Applied overhead:

—————Total Cost
=========

Calculated Cost per unit

$__________

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