Share
Explore BrainMass

Mitsu Corporation Activity Based Accounting

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:
Standard High Grade Total
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:
Activity Level
Cost-Driver Base to each product if direct labor cost had been used to allocate overhead? Cost Assigned Standard High Grade Total
Number of production runs..........................$1,200,000 40 10 50
Quality tests performed................................. 1,500,000 12 18 30
Shipping orders processed................................300, 000 100 50 150
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?

-------------------

4.36
Activites and Resources Standard High-Grade Total
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 bases Standard High-Grade Total Costs Assigned
Number of production runs 40 10 50 $1,200,000
Quality tests performed 12 18 30 1,500,000
Shipping orders processed 100 50 150 300,000
Total manufacturing overhead $3,000,000

Comparative Costing Analyses
a. ABC (Costs traced to products by activities)
Production-run cost-driver rate per production run
Quality test cost-driver rate per quality test
Shipping orders cost-driver rate per shipping order
Product costs Standard High-Grade Total
Direct labor
Direct material
Manufacturing overhead
Total cost
Cost per unit
b. Traditional (Direct-labor based) costing analysis
Direct-labor based allocation rate of direct labor cost
Product costs Standard High-Grade Total
Direct labor
Direct material
Manufacturing overhead
Total cost
Cost per unit
Extra: Reconciliation of overhead costs
ABC Traditional
Total overhead activity costs
Overhead activity traced or applied
Under (Over) applied overhead

Attachments

Solution Summary

Solution is put into Excel grid. You can get the formula by clicking on the cells. We didn't have rates based on estimated overhead and then applied based on actual activity so there was no over or under applied overhead.

$2.19