Question 26.IP.1: Hammer Company plans to use activity-based costing to determ...
Hammer Company plans to use activity-based costing to determine its product costs. It presently uses a single plantwide factory overhead rate for allocating factory overhead to products, based on direct labor hours. The total factory overhead cost is as follows:
| Department | Factory Overhead |
| Production Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $1,225,000 |
| Production (factory overhead only) . . . . . . . . . . . . . . . . . . . . | 175,000 |
| Total cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | \underline{\underline{\$ \ 1,400,000}} |
The company determined that it performed four major activities in the Production Support Department. These activities, along with their budgeted activity costs, are as follows:
| Production Support Activities | Budgeted Activity Cost |
| Setup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $ 428,750 |
| Production control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 245,000 |
| Quality control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 183,750 |
| Materials management . . . . . . . . . . . . . . . . . . . . . . . . . . . | 367,500 |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | \underline{\underline{\$ \ 1,225,000}} |
Hammer Company estimated the following activity-base usage and units produced
for each of its three products:
| Products | Number of Units | Direct Labor Hrs. | Setups | Production Orders | Inspections | Material Requisitions |
| TV . . . . . . . . . . . . . . . . . . . . . . | 10,000 | 25,000 | 80 | 80 | 35 | 320 |
| Computer . . . . . . . . . . . . . . . | 2,000 | 10,000 | 40 | 40 | 40 | 400 |
| Cell phone . . . . . . . . . . . . . . | 50,000 | 140,000 | 5 | 5 | 0 | 30 |
| Total cost . . . . . . . . . . . . . | \underline{\underline{62,000}} | \underline{\underline{175,000}} | \underline{\underline{125}} | \underline{\underline{125}} | \underline{\underline{75}} | \underline{\underline{750}} |
Instructions
1. Determine the factory overhead cost per unit for the TV, computer, and cell phone under the single plantwide factory overhead rate method. Use direct labor hours as the activity base.
2. Determine the factory overhead cost per unit for the TV, computer, and cell phone under activity-based costing. Round to whole cents.
3. Which method provides more accurate product costing? Why
