LO.4 (ABC) Madolfo Ltd. manufactures two products. Following is a production and cost analysis for each product for 2010: Excel Cost Component Product A Product B Both Products Cost Units produced Raw material used (units) X 10,000 50,000 10,000 50,000 20,000 100,000 $800,000 Y 100,000 100,000 $200,000 Labor hours used Department 1 $682,000 Direct labor 20,000 5,000 25,000 $375,000 Indirect labor Inspection 2,500 2,400 4,900 Machine operations 5,000 10,000 15,000 Setups 252 248 500 Department 2 $462,000 Direct labor 5,000 5,000 10,000 $200,000 Indirect labor Inspection 2,680 5,000 7,680 Machine operations 1,000 3,860 4,860 Setups Machine hours used 250 310 560 Department 1 5,000 10,000 15,000 $400,000 Department 2 5,000 20,000 25,000 $800,000 Power used (kW hours) $400,000 Department 1 1,500,000 Department 2 8,500,000 Other activity data Building occupancy $1,000,000 Purchasing $100,000 Number of purchase orders Material X 200 Material Y 300 Square feet occupied Purchasing 10,000 Power 40,000 Department 1 200,000 Department 2 250,000 Kevin Sharp, the ﬁrm’s cost accountant, has just returned from a seminar on activity- based costing. To apply the concepts he has learned, he decides to analyze the costs incurred for Products A and B on an activity basis. In doing so, he speciﬁes the follow- ing ﬁrst and second allocation processes: FIRST STAGE: ALLOCATIONS TO DEPARTMENTS Cost Pool Cost Object Activity Allocation Base Power Departments Kilowatt hours Purchasing Material Number of purchase orders Building occupancy Departments Square feet occupied SECOND STAGE: ALLOCATIONS TO PRODUCTS Cost Pool Cost Object Activity Allocation Base Departments Indirect labor Products Hours worked Power Products Machine hours Machinery related Products Machine hours Building occupancy Products Machine hours Material purchasing Products Materials used Source: Adapted from Harold P. Roth and A. Faye Borthick, “Getting Closer to Real Product Costs,” Management Accounting (May 1989), pp. 28–33. Reprinted from Management Accounting. Copyright by Institute of Management Accountants, Montvale, NJ. Determine the total overhead for Madolfo Ltd. Determine the plantwide overhead rate for the company, assuming the use of direct labor hours. Determine the cost per unit of Product A and Product B, using the overhead rate found in (b). Determine the cost allocations to departments (ﬁrst-stage allocations). Allocate costs from the departments in the following order: building occupancy, purchasing, and power. Finish the cost allocations for one department to get an “adjusted” cost to allocate to the next department. Using the allocations found in (d), determine the cost allocations to products (second-stage allocations). Determine the cost per unit of Product A and Product B using the overhead alloca- tions found in (e).
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