Problem P4-1B, Waves Galore, Inc. manufactures hair curlers and
blow-dryers. The handheld hair curler is Waves Galore's high volume
product, 80,000 units annually. It is a "large barrel", 20-watt,
triple-heat appliance designed to appeal to the teenage market segment
with its glow-in-the-dark handle. The handheld blow-dryer is Waves
Galore's lower-volume product, 40,000 units annually. IT is a
three-speed, 2,000 watt appliance with a "cool setting" and a removable
filter. It also is designed for the teen market. Both products require 1
hour of direct labor for completion. Therefore, total annual direct
labor hours are 120,000 (80,000 + 40,000). Expected annual manufacturing
overhead is $441,600. Thus, the predetermined overhead rate is $3.65
per direct labor hour. The direct material cost per unit is $5.25 for
the hair curler and 9.75 for the blow-dryer. The direct labor cost is
$8.00 per unit for the hair curler and blow-dryer.
Waves Galore purchases most of its parts from suppliers and assembles
the finished products at its Fargo, North Dakota plant. It recently
adopted activity-based costing, which after year-end will totally
replace its traditional direct labor-based cost accounting system. Waves
Galore has identified the following six activity cost pools and related
cost drivers and has assembled the following information.
Activity Cost Pool Cost Driver Estimated Overhead Expected Use of Cost Drivers Expected Use of Drivers by Product
Curlers Dryers
Purchasing Orders $57,500 500 170 330
Receiving Pounds 42,000 140,000 58,000 82,000
Assembling Parts 166,000 830,000 415,000 415,000
Testing Tests 52,000 130,000 82,000 48,000
Finishing Units 60,000 120,000 80,000 40,000
Packing and shipping Cartons 60,500 12,100 8,040 4,060 $438,000
Instructions:
(a) Under traditional product costing, compute the total unit cost of
both products. Prepare a single comparative schedule of the individual
costs by products, in the format provided below.
(b) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).
(c) Prepare a schedule assigning each activity's overhead cost pool to
each product based on the use of cost drivers. (Include a computation of
overhead cost per unit, rounding to the nearest cent.)
(d) Compute the total cost per unit for each product under ABC.
(e) Classify each of the activities as a value-added activity or a non-value-added activity.
(f)(1) Comment on the comparative overhead cost per unit for the two products under ABC.
(f)(2) Comment on the comparative total costs per unit under traditional costing and ABC.
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