Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A's production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data have been gathered for the two products. Product
Model A Model B
Units produced per year 10,000 Units produced per year 100,000
Prime Costs $150,000 Prime Costs $1,500,000
Direct Labor Hours 140,000 Direct labor Hours 300,000
Machine Hours 20,000 Machine Hours 200,000
Production runs 40 Production runs 60
Inspection hours 800 Inspection hours 1200
Maintenance hours 10,000 Maintenance hours 90,000
Overhead costs:
Setup costs $270,000
Inspection costs $210,000
Machining $240,000
Maintenance $270,000
Total overhead costs $990,000
1. Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours (Round to two decimal places).
2. Compute the overhead cost per unit for each product by using ABC (Round to two decimal places).
3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (Machine intensive) with a rate of $3.50 per machine hour and Department 2 (labor intensive) with a rate of $0.90 per direct labor hour. The consumption of these two drivers is as follows:
Department 1 Machine Hours Department 2 Direct Labor hours
Model A 10,000 Model A 130,000
Model B 170,000 Model B 270,000
Compute the overhead costs per unit for each product by using departmental rates.
4. Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the department rate do better than the plant rate?