Material Costing Formula

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Managerial Accounting, 3rd Edition, by Weygandt, Kieso, and Kimmel
Solving Managerial Accounting Problems Using Microsoft Excel for Windows by Rex A Schildhouse
Problem P4-1B, Waves Galore, Inc. manufactures hair curlers and blow-dryers. The handheld hair curler is Waves Galore's high volume
product,         80,000    units annually. It is a "large barrel", 20-watt, triple-heat appliance designed to appeal to the teenage market
segment with its glow-in-the-dark handle. The handheld blow-dryer is Waves Galore's lower-volume product,                         40,000      units
annually. IT is a three-speed, 2,000 watt appliance with a "cool setting" and a removable filter. It also is designed for the teen market.
Both products require            1             hour of direct labor for completion. Therefore, total annual direct labor hours are          120,000
    (80,000 + 40,000)             Expected annual manufacturing overhead is                      $441,600          Thus, the predetermined overhead
   rate is        $3.65     per direct labor hour. The direct material cost per unit is            $5.25          for the hair curler and    $9.75
      for the blow-dryer. The direct labor cost is              $8.00         per unit for the hair curler and blow-dryer.
Waves Galore purchases most of its parts from suppliers and assembles the finished products at its Fargo, North Dakota plant. It recently
adopted activity-based costing, which after year-end will totally replace its traditional direct labor-based cost accounting system. Waves
Galore has identified the following six activity cost pools and related cost drivers and has assembled the following information.

                                                                        Expected           Expected Use of Drivers by Product
                                                           Estimated   Use of Cost
   Activity Cost Pool              Cost Driver             Overhead      Drivers             Curlers                        Dryers
Purchasing                           Orders                    $57,500        500                   170                         330
Receiving                           Pounds                      42,000    140,000               58,000                       82,000
Assembling                           Parts                     166,000    830,000              415,000                      415,000
Testing                              Tests                      52,000    130,000               82,000                       48,000
Finishing                            Units                      60,000    120,000               80,000                       40,000
Packing and shipping                Cartons                     60,500     12,100                 8,040                       4,060
                                                             $438,000

Instructions:
(a) Under traditional product costing, compute the total unit cost of both products. Prepare a single comparative schedule of the individual
costs by products, in the format provided below.

                                                                                   Products
                             Manufacturing Costs                 Home Model                   Commercial Model
                           Label                                   Amount                         Amount
                           Label                                   Amount                         Amount
                           Label                                   Amount                         Amount
                             Total unit cost                       Formula                       Formula

(b) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).

                            Estimated                       Total Expected Use of                               Activity-Based
   Activity Cost Pool                            ÷                                               =
                            Overhead                             Cost Drivers                                   Overhead Rate
Purchasing                      Amount           ÷              Amount Label                     =                  Amount             Label
Receiving                       Amount           ÷              Amount Label                     =                  Amount             Label
Assembling                      Amount           ÷              Amount Label                     =                  Amount             Label
Testing                         Amount           ÷              Amount Label                     =                  Amount             Label
Finishing                       Amount           ÷              Amount Label                     =                  Amount             Label
Packing and shipping            Amount           ÷              Amount Label                     =                  Amount             Label
                               Formula




                FileName: b2ac86a2-3fad-4926-89bf-c5a090bf1099.xls, Tab: Problem P4-1B, Page 1 of 3, 4/21/2011, 1:31 PM
(c) Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a computation
of overhead cost per unit, rounding to the nearest cent.)

                                                            Curler                                                   Dryer
                                                           Activity-                                               Activity-
                                           Expected                                                   Expected
                                                            Based            Cost                                   Based          Cost
   Activity Cost Pool                       Use of                                                     Use of
                                                           Overhead        Assigned                                Overhead      Assigned
                                            Drivers                                                    Drivers
                                                            Rates                                                   Rates
Label                                           Amount         Amount         Formula                     Amount     Amount          Formula
Label                                           Amount         Amount         Formula                     Amount     Amount          Formula
Label                                           Amount         Amount         Formula                     Amount     Amount          Formula
Label                                           Amount         Amount         Formula                     Amount     Amount          Formula
Label                                           Amount         Amount         Formula                     Amount     Amount          Formula
Label                                           Amount         Amount         Formula                     Amount     Amount          Formula
Total costs assigned                                                          Formula                                                Formula
Units produced                                                                Amount                                                 Amount
Overhead cost per unit                                                        Formula                                                Formula

(d) Compute the total cost per unit for each product under ABC.

                          ABC Manufacturing Costs                   Curler                       Dryer
                          Direct materials                         Amount                       Amount
                          Direct labor                             Amount                       Amount
                          Overhead                                 Amount                       Amount
                            Total cost per unit                    Formula                      Formula

(e) Classify each of the activities as a value-added activity or a non-value-added activity.

                                     Activity                   Value - Vs - Non-Value-Added
                          Label                                Value added or Non-value-added
                          Label                                Value added or Non-value-added
                          Label                                Value added or Non-value-added
                          Label                                Value added or Non-value-added
                          Label                                Value added or Non-value-added
                          Label                                Value added or Non-value-added

(f)(1) Comment on the comparative overhead cost per unit for the two products under ABC.




(f)(2) Comment on the comparative total costs per unit under traditional costing and ABC.




                FileName: b2ac86a2-3fad-4926-89bf-c5a090bf1099.xls, Tab: Problem P4-1B, Page 2 of 3, 4/21/2011, 1:31 PM
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