Calculating Cost

profileRAJV47

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 is $800,000 and 25,000 hours, respectively. Information about the company's products follows.

 Standard:Enhanced:

Estimated production volume

3,000 units4,000 units

Direct-material cost

$25 per unit$40 per unit

Direct labor per unit

3 hours at $12 per hour4 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.

Data relevant to these activities follow:

 Orders ProcessedMachine Hours WorkedInspection Hours

Standard

30018,0002,000

Enhanced

20022,0008,000

Total

50040,00010,000

Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed—machinery that was expected to produce significant operating efficiencies.

Using a Microsoft Excel format for calculations, complete the following:

  • Assuming use of direct-labor hours to apply overhead to production, calculate the unit manufacturing costs of the standard and enhanced products if the expected manufacturing volume is attained.
  • Assuming the use of activity-based costing, calculate the unit manufacturing cost of the standard and enhanced products if the expected manufacturing volume is attained.
  • Ontario’s selling price is based heavily on cost:
    • Calculate which product is over cost and which is under cost by using direct-labor hours as an application base.
    • Explain if it is possible that this over costing and under costing is responsible for the profit issues the company is facing.
  • Illustrate how the solution will change if the following data changes:
    • The overhead associated with order processing is $300,000 and the overhead associated with product inspection is $270,000.

Present your work in Microsoft Excel spreadsheet format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M5_A2.xls.ok

    • 9 years ago
    • 5
    Answer(2)

    Purchase the answer to view it

    blurred-text
    • attachment
      lastnamefirstinitial_m5_a2.xlsx

    Purchase the answer to view it

    blurred-text
    NOT RATED
    • attachment
      ontario_inc._calculating_cost.xlsx
    Bids(0)