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Hello John.
I would appreciate your help with this question.
There are two products R and S:
Products—————————————–R————–S
Production units—————————-80000——–60000
Batch size units——————————100————50
Machine setup per batch——————–3————–3
Processing time per unit (minutes)—-3 mints——5 mintsCosts Pool:
Machine setup cost——-$180000
Processing——————$108000
Order cost——————-$150000
Inspection cost————-$120000
Total overheads————$558000Overhead Absorption rate:
This is the rate that is used to absorb or allocate the fixed costs related to each product.OAR = Total Overheads / Total Cost driver
1) Machine setup cost:
OAR = $180,000 / 450 = $400 per machine setup per batch2) Processing cost:
OAR = $108,000 / 9000 = $12 per processing time per hour3) Order cost:
OAR = $150,000 / 150 = $1000 per batch4) Inspection cost:
OAR = $120,000 / 140,000 = $0.857Absorb overhead to each product:
1) Machine setup cost
Product R = $400 x 300 batch = $120,000
Product S = $400 x 150 batch = $60,0002) Processing cost
Product R = $12 x 4000 hour = $48,000
Product S = $12 x 5000 hour = $60,0003) Order cost
Product R = $1000 x 100 hour = $100,000
Product S = $1000 x 50 hour = $50,0004) Inspection cost
Product R = $0.857 x 80000 hour = $68,560
Product S = $0.857 x 60000 hour = $51,420Is that all correct?
1. Machine set up cost. There are 800 + 1,200 = 2,000 batches (not 450).
2. The total processing time is ((80,000 x 3) + (60,000 x 3)) / 60 = 60 hours (not 9,000 hours).
3. There is not enough information in the question to know how to absorb either the order cost or the inspection cost.
Sorry I do not understand it ’cause the correct cost drivers are as follows:
The correct cost driver for machine setup cost is machine setups per batch:
Total Machine setups : (100 x 3) + (50 x 3) = 450The correct cost driver for processing cost is processing time per unit:
Total Processing time in hours : (80000 x 3/60) + (60000 x 5/60) = 9000 hoursOR we can do this way (both gives same answer)
Total Processing time in hours : (80000 x 3) + (60000 x 5) / 60 = 9000 hoursThe correct cost driver for order cost is batch size:
Total Batches : 100 + 50 = 150The correct cost driver for inspection cost is production units:
Total production units = 80000 + 60000 = 140,0001) You said that machine setup cost is absorbed using batches but you didn’t see the machine setup per batch (which is the correct cost driver) is already given above.
2) I am afraid you are mistaken in calculating total processing time here because the correct answer is 9000 hours just the way I calculated above. You took 3 instead of 5 minutes for product S
Please tell me where I am wrong and why?
Machine set-ups:
I did see that the machine set up per batch was given,
However there are not 100 batches of product R. 100 is the batch size and therefore the number of batches is 80,000/100 = 800 and similarly there are 60,000/50 batches of S.Processing cost:
You are correct in that I took the wrong figure by mistake. The total processing time is ((80,000 x 3) + (60,000 x 5))/60 = 9,000 hours. Sorry 🙁
However, again, I am puzzled as to why you are attempting a question for which you do not have an answer 🙂
According to your answer, we need a number of batches to calculate total machine setups as a cost driver for machine setup costs like this:
1) Machine cost:
Total number of batches = (80000 / 100) + (60000 / 50) = 2000But since the cost driver for machine setup costs is machine setup per batch. we need to calculate total machine setups.
Total machine setups:
Product A = (800 batch x 3 setups) = 2400
Product B = (1200 batch x 3 setups) = 3600
Total machine setups = 6000Overhead absorption rate = $180,000 / 6000 = $30 per machine setups
Absorb overhead to each product:
Product A = $30 x 2400 = $72,000
Product B = $30 x 3600 = $108,000It is correct now SIR?
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