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Managerial Acct: HI LOW Method; Activity Based Costing COGS

See the attached file.
Laramie Company has the following inventory balances, in dollars, for the current year:

Beginning Ending
Raw Materials 820,000 812,000
WIP 135,000 146,000
Finished Goods 491,000 516,000

Materials purchases were $2,544,000 and direct labor was $3,200,000. Overhead is applied at 60% of direct labor.

Required: Compute cost of goods sold for the year.

Wheatland Industries has experienced the following electricity costs over recent months:

Cost ($) Units Produced
28,000 15,300
26,500 13,000
31,400 20,000
27,700 14,200
33,600 19,100
25,800 13,900

Required: a) Using the hi/lo method, derive a linear equation describing the behavior of electricity cost
b) Using the equation from part a, compute the expected electricity cost at 18,000 units of production

a) Douglas Corporation expects to incur $6,000,000 in factory overhead for the current year. Expected direct labor in the factory is 100,000 hours.
Required: Compute the overhead allocation rate.

b) Douglas is considering adopting an ABC system, with four overhead pools as follows:

Cost Budgeted activity
Setup $2,440,000 200 setups
Parts $1,630,000 500 parts
Machining $1,200,000 60,000 machine hours
General o/h $730,000 100,000 direct labor hours

Required: Compute the overhead allocation rate for each cost pool

c) Product X22 is expected to use the following resources in the current year:

Direct labor hours 12,000
Machine hours 6,800
Parts 45
Setups 15

Required: Compute the amount of overhead allocated to X22 under the traditional method of part a) above, and under the ABC method.
Comment briefly as to why the amounts differ and which method is more accurate? Explain briefly why it is more accurate.


Solution Summary

The spreadsheet shows how to approach these problems, gives you a layout to use for similar problems and discusses traditional versus activity based costing methods.