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Problem E Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashions. Sunshield 1 answer below » Problem E Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashions. Sunshield presently allocates overhead to products using a rate based on direct labor-hours. A consultant recommended that Sunshield switch to activity-based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity center. Use this information to compute the overhead rates for each cost driver. A c t i View complete question » Problem E Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashions. Sunshield presently allocates overhead to products using a rate based on direct labor-hours. A consultant recommended that Sunshield switch to activity-based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity center. Use this information to compute the overhead rates for each cost driver. A c t i vi t y R e c o m m e n d e d C o st s Co s t d r i v er co s t d r i v er un i t s Production setup Production runs $ 30,000 100 Order processing Orders 50,000 200 Materials handling Pounds of 20,000 8,000 materials used Equipment depreciation Machine-hours 60,000 10,000 and maintenance Quality management Inspections 50,000 40 Packing and shipping Units shipped 40,000 20,000 Total overhead $250,000 In addition, there are 2,500 direct labor-hours in a typical year. Assume the following activities occurred in February of 2011: Ner d s S t ars F a s h i o n s Units produced 1,000 500 400 Direct materials costs $4,000 $2,500 $2,000 Direct labor-hours 100 100 89 Orders 8 8 4 Production runs 2 4 8 Pounds of material 400 200 200 Machine-hours 500 300 300 Inspections 2 2 2 Units shipped 1,000 500 300 Direct labor costs are USD 15 per hour. Compute an overhead allocation rate (1) for each of the cost drivers recommended by the consultant and (2) for direct labor. Management wants to compare the product costs using ABC and the traditional method for the month of February. Compute the production costs for each product for February using direct labor- hours as the allocation base. (Note: Production costs are direct materials, direct labor, and overhead.) To derive product costs under ABC, compute the production costs for each product for February using the cost drivers recommended by the consultant. Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using direct labor-hours as the allocation base and using activity-based costing. Write a brief response to management. View less » Aug 21 2015 06:48 PM
