Plata Company produces two products: a mostly handcrafted soft leather briefcase under the label Maletin Elegant and a leather briefcase produced largely through automation and sold under the label Maletin Fina. The two products use two over- head activities, with the following costs:
Setting up equipment $ 3,000 Machining 18,000
The controller has collected the expected annual prime costs for each briefcase, the machine hours, the setup hours, and the expected production.
| |
Elegant
|
Fina |
|
Direct labor
|
$9,000
|
$3,000
|
|
Direct materials
|
$3,000
|
$3,000
|
|
Units
|
3,000
|
3,000
|
|
Machine hours
|
500
|
4,500
|
|
Setup hours
|
100
|
100
|
Required
1. Do you think that the direct labor costs and direct materials costs are accurately traced to each briefcase? Explain.
2. Calculate the consumption ratios for each activity.
3. Calculate the overhead cost per unit for each briefcase, using a plantwide rate based on direct labor costs. Comment on this approach to assigning overhead.
4. Calculate the overhead cost per unit for each briefcase using overhead rates based on machine hours and setup hours. Explain why these assignments are more accurate than using direct labor costs.