Share
Explore BrainMass

Activity based costing; cost analysis for Ontario, Inc.

Ontario, Inc. Manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively. Information about the company's products follows.

Standard:
Estimated production volume, 3000 units
Direct-material cost, $25 per unit
Direct-labor per unit, 3 hours at $12 per hour
Enhanced:
Estimated production volume, 4000 units
Direct-material cost, $40 per unit
Direct-labor per unit, 4 hours at $12 per hour

Ontario's overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). these activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Date relevant to these activities follows.

orders processed machine hours worked inspection hours

Standard.... 300 18,000 2000

Enhanced.... 200 22,000 8000

total..... 500 40,000 10,000

1. Assuming use of direct-labor hours to apply overhead to production, compute the unit manufacturing costs of the standard and enhanced products if the expected manufacturing volume is attained.

2. Assuming use of activity-based costing, compute the unit manufacturing costs of the standard and enhanced products if the expected manufacturing volume is attained.

3. Ontario's selling prices are based heavily on cost.

a. By using direct-labor hours as an application base, which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each product

b. Is it possible that overcosting and undercosting, and the susequent determination of selling prices are contributing to the company's profit woes? Explain

4. Build the spreadsheet: construct an excel spreadsheet to solve requirements 1, 2 and 3 (a) above. how will the solution change if the following data change: the overhead associate with order processing is $300,000 and the overhead associated with product inspection is $270,000.

Solution Preview

Please find the solution attached.

Ontario

1)
Budgeted Overhead $800,000
Budgeted Direct Labor Hours 25000
Predetermined Overhead Rate $32

Standard Enhanced
Direct Materials $25 $40
Direct Labor $36 $48
Manufacturing Overhead $96 $128
Total Cost $157 $216

2)
Activity-based Overhead Application Rates:
Activity Cost Activity Cost Driver Application Rate
Order Processing $150,000 500 $300
Machine ...

Solution Summary

Activity based costing cost analysis for Ontario, Inc. is analyzed. The process to enhance volume of sales is also discussed.

$2.19