Question : CHALLENGE EXERCISES 171.VeraTrac has traditionally used direct labor cost to allocate : 1302779

CHALLENGE EXERCISES

171.VeraTrac has traditionally used direct labor cost to allocate overhead to its two products—hammers and mallets. To improve cost determination, VeraTrac set up 3 activity pools: setups, purchase ordering, and quality control. VeraTrac provided the following information for the last quarter of 2014 related to the actual production of 2,400 hammers and 1,600 mallets:

Estimated CostExpected ActivityActual CostActual Activity

HammersMallets

Setups$78,000240 setups$81,400145 setups90 setups

Purchase ordering35,100900 orders34,800420 orders470 orders

Quality control41,000500 inspections42,300220 inspections275 inspections

Direct labor43,8003,650 hours46,8752,150 hours1,600 hours

Direct materials19,3604,400 pounds19,8002,100 pounds3,400 pounds

Actual labor cost is $12.50 per hour and actual material cost is $3.60 per pound.

a.                   How much is the overhead unit cost of each hammer using activity-based costing?

b.                   How much is the overhead unit cost of each hammer if the company continues to use one cost pool? (Round your intermediate calculations to two decimal places)

c.                   Is the cost of the hammer over or undercosted? Explain some possible consequences of this.

172.Sandifer Company is contemplating the establishment of an activity-based costing system. It current applies all overhead cost based on direct labor costs. The company has estimated the following costs and activities for May:

CostActivity

Machine Setups$33,600400 setups

Utilities60,000200,000 usage hours

Materials Handling84,00012,500 crates

Direct labor35,520$20 per labor hour

Direct material60,000$1 per pound

Direct labor cost is $20 per hour. The following information pertains to the actual production of buckets and pails during May:

BucketsPails

Units produced60,00040,000

Direct material cost incurred$30,000$31,200

Direct labor cost incurred ($20 per hour)$24,000$12,000

Setups implemented120290

Crates handled6,8005,200

Utility hours used80,000125,000

a.1.Which items are cost pools?

2.Which are cost drivers?

3.Which are cost objectives?

b.How much is the product cost per pail if Sandifer uses one cost pool to allocate all overhead costs to the cost objectives?

c.How much is the product cost per pail if Sandifer uses ABC?

173.Clark Inc. has 3 operating departments—commercial, industry, and private for which the corporate office provides 2 kinds of services, accounting and housekeeping. Accounting costs are allocated on the basis of number of employees, and housekeeping costs are allocated based on the basis of number of square feet.

Direct costs# of Square feet# of Employees

Accounting   $ 56,000     2,000 10

Housekeeping33,0003,0005

Commercial116,0006,00035

Industry124,0004,00040

Private105,0008,00025

                How much total cost will Clark, Inc. allocate to the commercial department?

                As it relates to Clark, Inc., what is meant by a cause-and-effect relationship?