Please help complete the attached exercise
Mitsu Corporation produces two types of flat screen televisions. The standard televisions are designed for durability. The company recently began producing the higher quality, high grade model to appeal to dedicated watchers. Since the introduction of the high grade product, profits have steadily declined. Management believes that the accounting system might not accurately allocating costs to products.
Management has asked you to investigate the cost-allocation problem. You find that manufacturing overhead is currently assigned to products based on direct labor costs in the products. For your investigation, you have data from last month. Last month's manufacturing overhead was $3,000,000 based on the production of 3,600 standard units and 1,200 high grade units. Direct labor and direct material costs were as follows:
Direct Labor ..................$1,740,000$ 660,000$2,400,000
Direct Material............. $1,400,000 1,200,000$2,600,000
Management believes that overhead costs are caused by three cost drivers. The cost drivers and their costs for last month were as follows:
Cost-Driver Baseto each product if direct labor cost had been used to allocate overhead?Cost AssignedStandardHigh GradeTotal
Number of production runs..........................$1,200,000 4010 50
Quality tests performed................................. 1,500,000 1218 30
Shipping orders processed................................300, 00010050150
Total manufacturing overhead$3,000,000
a.How much of the overhead will be assigned to each product if these three cost-driver bases are used to allocate overhead? What is the total cost per unit produced for each product?
b.How much of the overhead was assigned to each product if direct labor cost had been used to allocate overhead? What is the total cost per unit produced for each product? Is total overhead cost affected by the choice of traditional or ABC costing for overhead?
c.How might the results from using activity-based costing in requirement (a) help management understand Mitsu's declining profits?
Activites and ResourcesStandardHigh-GradeTotal
Units produced 3,600 1,200
Direct labor $1,740,000 $660,000 $2,400,000
Direct material 1,400,000 1,200,000 2,600,000
Manufacturing overhead 3,000,000
Total costs $8,000,000
Cost driver basesStandardHigh-GradeTotalCosts Assigned
Number of production runs401050 $1,200,000
Quality tests performed121830 1,500,000
Shipping orders processed10050150 300,000
Total manufacturing overhead $3,000,000
Comparative Costing Analyses
a. ABC (Costs traced to products by activities)
Production-run cost-driver rateper production run
Quality test cost-driver rateper quality test
Shipping orders cost-driver rateper shipping order
Cost per unit
b. Traditional (Direct-labor based) costing analysis
Direct-labor based allocation rateof direct labor cost
Cost per unit
Extra: Reconciliation of overhead costs
Total overhead activity costs
Overhead activity traced or applied
Under (Over) applied overhead
This question was answered on: Sep 16, 2020
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