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UGA ACCT 2102 - In Class Examples of ABC
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ACCT 2102 1st Edition Lecture 13 Outline of Last Lecture:I. Example with ABC CostingII. Other ABC ConsiderationsOutline of Current Lecture:III. In Class Example # 1IV. In Class Example # 2Current Lecture: In Class Examples of ABC (Chapter 4)III. In Class Example #1:Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected despite high production levels. Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy. Currently, manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit production costs. The following information has been prepared:(GIVEN)Activity Cost Driver Cost PoolAssembly DL Hours $500Machining Machine Hours $1,500Setting Up Equipment Number of Setups $1,200Moving Goods Number of Moves $800(WORKED)Activity Cost Driver Cost Pool Acoustic Electric TotalAssembly DL Hours $500 20 DL hours 80 DL Hours 100 DL These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.hoursMachining Machine Hours$1,500 10 M Hours 40 M Hours 50 M HoursSetting Up EquipmentNumber of Setups$1,200 4 Setups 4 Setups 8 SetupsMoving GoodsNumber of Moves$800 1 Move 4 Moves 5 MovesTotal $4,000Each Acoustic guitar requires 1 direct labor hour and .5 machine hours to produce. Each Electric guitar requires .8 direct labor hours and .4 machine hours to produce. The production equipment is setup for every 5 Acoustic guitars produced and for every 25 Electric guitars produced. Acoustic guitars are moved during production in groups of 20 guitars; Electric guitars are moved during production in groups of 25 guitars.The direct material cost per Acoustic guitar is $60 and the direct material cost per Electric guitaris $70. Direct Laborers are paid at a rate of $25 per hour. The projected production levels for theperiod are 20 Acoustic guitars and 100 Electric guitars.Determine the amount by which the lines are over/underallocated IN TOTAL.Traditional Costing System ABC Costing SystemPOHR 1 = $4,000 = $40/DL hr 100 DL hrsPOHR 1 = $500 = $5/DL hr 100 DL hrsPOHR 2 = $1,500 = $30/m hr 50 m hrs.POHR 3 = $1,200 = $150/setup 8 setupsPOHR 4 = $800 = $160/move 5 movesAcoustic (per unit approach)DM $60DL ($25 x 1 hr) $25MOH ($40 x 1 hr) $40DM $60DL ($25 x 1 hr) $25MOH 1 ($5 x 20 hrs / 20) $5Total per unit $125 2 ($30 x 10 hrs / 20) $15 3 ($150 x 4 setup / 20) $30 4 ($160 x 1 move / 20) $8Total per unit $143$125 - $143 = $18/unit undercosted Total undercosted? $18/unit x 20 guitars = $360 undercostedElectricDM $70DL ($25 x .8 hrs) $20MOH ($40 x .8 hrs) $32Total job cost $122DM $70DL ($25 x .8 hrs) $20MOH 1 ($5 x 80 hrs / 100) $4 2 ($30 x 40 hrs / 100) $12 3 ($150 x 4 setup / 100) $6 4 ($160 x 4 move / 100) $6.4Total job cost $118.40$122 - $118.40 = $3.60/unit overcosted Total overcosted? $3.60/unit x 100 guitars = $360 overcosted*The higher volume product is normally overcosted by the traditional system.IV. In Class Example #2:Don’t Cry Over Spilled Milk, LLC manufactures two lines of mops: Wooden Handled and Metal Handled. Under the traditional costing system, manufacturing overhead is applied to each line based on machine hours. Machine Setup costs account for the majority of manufacturing overhead costs and are budgeted to be $75,000 for the current period. The controller for Don’t Cry has suggested to management that an activity based costing system be analyzed and has determined that the number of machine setups drives the total machine setup costs. The following information was compiled for the analysis:(GIVEN)Wooden Handled Metal HandledMachine Hours per Mop 2 5Budgeted Number of Mops to Be Produced 750 500Number of Mops to Be Produced per Machine Setup 25 10(WORKED)Wooden Handled Metal Handled TotalMachine Hours 750 x 2 = 1,500 MHours500 x 5 = 2,500 MHours4,000 M HoursMachine Setups 750 / 25 = 30 Setups 500 / 50 = 10 Setups 80 SetupsWhich product line is overcosted with respect to machine setup costs?Traditional Costing System ABC Costing SystemPOHR 1 = $75,000 = $18.75/m hr 4,000 m hrsPOHR 1 = $75,000 = $937.50/setup 80 setupsWooden (Total approach)MOH ($18.75 x 1,500 m hrs) $28,125 MOH 1 ($937.50 x 30 setups) $28,125Not over or undercosted!MetalMOH ($18.75 x 2500 m hrs) $46,875 MOH 1 ($937.50 x 50 setups) $46,875Not over or undercosted!*Since both jobs are neither under or overcosted, this company should not implement ABC costing system for their


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UGA ACCT 2102 - In Class Examples of ABC

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