Question

The Lamp Company (TLC) produces a variety of lamps in a highly automated manufacturing facility. The costs and cost drivers associated with four activity cost centers are given below. These data represent total costs for all types of lamps produced by the Company.Activity Center Unit-level Batch-level Product-level Facility-levelOverhead Cost $ 60,000 $ 24,000 $ 12,000 $ 72,000 Cost Driver 10,000 labor hrs 480 setup % of use 72,000 unitsAllocation Rate $ 6 per labor hr $ 50 per setup $ 1 per unitDuring the most recent accounting period TLC made 5,000 units of its miniature tiffany lamps. Making the lamps required 600 labor hours, 30 setups, and consumed 20% of the product-level costs. The sales price of the lamps is $18 each. Direct labor and materials cost amounts to $15.80 per lamp. Assume the Company uses a cost plus model to price its products. (Round all computations to three decimal places)If the Company allocates overhead costs using a direct labor hours as the single companywide allocation rate, the Company will show a loss of $0.184 per unit.If the Company allocates overhead costs using activity-based costing, the Company will show a profit of $0.30 per unit.If the Company allocates overhead costs using a direct labor hours as the single companywide allocation rate, the lamps will be underpriced.None of the answers is correct.

Answer 1

Answer:

$0.184 per unit profit

$0.30 per unit loss

Explanation:

labor hours will be the base to allocate total overhead cost:

Therefore:

Using this formula

Cost to be allocated ÷ Allocation base = Allocation rate

($60,000 + 24,000 + 12,000 + 72,000) ÷ 10,000 labor hours = $16.80 per labor hour

$16.80 x 600 labor hours = $10,080

$10,080÷ 5,000 units = $2.016 per unit

$18 – ($15.80 labor & materials + $2.016 allocated overhead)

= $0.184 per unit profit

Activity-based costing to allocate total overhead cost will be :

$6 per labor hour x 600 hours

= $3,600

Batch-level: $50 per setup x 30 = $1,500

Product-level: .20 percent x $12,000 = $2,400

Facility-level: $1 per unit x 5,000 units = $5,000

Hence:

Total allocation $3,600 + $1,500 + $2,400 + $5,000 = $12,500

Total allocated overhead$12,500

$12,500 ÷ 5,000 units = $2.50 per unit

Sales price per unit – Total product cost per unit = Profit or loss per unit

$18 – ($15.80 labor & materials + $2.50 allocated overhead)

= $0.30 per unit loss