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that Radley Products use tem. Its plantwide MOH rate would have been determined using direct labor (DL) hours as the allocation base. How much cost distortion would have occurred on this job? 4-25A Use ABC to allocate manufacturing overhead (Learning Objective 2) Several years after reengineering its production process, Dettling Corporation hired a new controller, Alana Metzgar. She developed an ABC system very similar to the one used by Dettling’s chief rival. Part of the reason Metzgar developed the ABC system was because Dettling’s profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old efore adopting the new ABC system, the company had used a plantwide overhead rate based on direct labor hours that was developed years ago. For the upcoming year, Dettling’s budgeted ABC manufacturing overhead allocation rates are as follows: Activity Cost Allocation Rate Activity Materials handling Machine setup.. Insertion of parts.. Allocation Base Number of parts Number of setups Number of parts Finishing direct labor hours $ 4.50 per part $325.00 per setup $ 31.00 per part $51.00 per hour The number of parts is now a feasible allocation base because Dettling recently installed a plantwide computer system. Dettling produces two wheel models: Standard and Deluxe. Budgeted data for the upcoming year are as follows: Standard Deluxe Setups per 1,000 wheels.. Finishing direct labor hours per whe!. Total direct labor hours per wheel…….. 4.0 20.0 1.0 2.7 6.0 20.0 3.0 3.8 The company’s managers expect to produce 1,000 units of each model during the year.
Expert Answer
E4 – 26A)
According to E4 – 25A, following are the results :
| Standard | Deluxe | |
| ABC Manufacturing Overhead Cost per wheel, based on break down of overhead under different overhead cost heads | $199.50 | $372.50 |
| Plantwise Traditional Manufacturing Overhead Cost per wheel, based on DLHs | $137.70 | $193.80 |
Now, solution to the problem,
1. Gross Profit per Wheel under ABC Manufacturing Overhead Cost :
| Standard | Deluxe | |
| Selling price per wheel | $460 | $630 |
| Less: expenses: | ||
| Direct Material | 33.5 | 48 |
| Direct Labor | 45.70 | 52 |
| ABC Manufacturing Overhead Cost | 199.50 | 372.50 |
| Total expenses | 278.70 | 472.50 |
| Gross Profit per wheel | $181.30 | $157.50 |
2. Gross Profit per Wheel under Traditional Manufacturing Overhead Cost :
| Standard | Deluxe | |
| Selling price per wheel | $460 | $630 |
| Less: expenses: | ||
| Direct Material | 33.5 | 48 |
| Direct Labor | 45.70 | 52 |
| Traditional Manufacturing Overhead Cost based on DLHs | 137.70 | 193.80 |
| Total expenses | 216.90 | 293.80 |
| Gross Profit per wheel | $243.10 | $336.20 |
3. For the company, under the ABC Overhead cost, the Standard product ($181.30) is more profitable than the Deluxe ($157.50).
For the company, under the Traditional Overhead cost, the Deluxe product ($336.20) is more profitable than the Standard product ($243.10).
4. The controller thinking that the expected ABC costing will pass the Cost-Benefit test because it segregates the Overheads in different parts and assign the cost at the micro points of the overhead. It assigns the overhead cost according to the usage of the overhead by the product.
The Traditional overhead costing method has broken because the overhead cost is less dependent on the DLHs but to the overhead towards “Insertion of parts” costs. The finishing DLHs have more influence on the Overhead cost than the Total DLHs. So, the ABC budgeted Manufacturing overhead cost is more correct to assign the overheads.
