As you learned in the previous chapters, Current Designs has two main product lines-composite kayaks, which are handmade and very labor-intensive, and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Designs' controller, Diane Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to ensure that costs are appropriately assigned to the company's products. At the same time, the system that is used must not be so complex that its costs are greater than its benefits.
Diane has decided to use the following activities and costs to evaluate the methods of assigning overhead.
Activities Cost
Designing new models $120,000
Creating and testing prototypes 160,000
Creating molds for kayaks 168,000
Operating oven for the rotomolded kayaks 42,000
Operating the vacuum line for the composite kayaks 26,000
Supervising production employees 175,000
Curing time (the time that is needed for the chemical processes to finish before the next step in the production process; many of these costs are related to the space required in the building) 221,000
Total $912,000
As Diane examines the data, she decides that the cost of operating the oven for the rotomolded kayaks and the cost of operating the vacuum line for the composite kayaks can be directly assigned to each of these product lines and do not need to be assigned with the other costs.
For purposes of this analysis, assume that Current Designs uses $231,000 in direct labor costs to produce 1,000 composite kayaks and $296,500 in direct labor costs to produce 4,000 rotomolded kayaks each year.
Activity-based costing requires a cost driver for each cost pool. Use the following information to assign the costs to the product lines using the activity-based costing approach.
Activity Cost Pools Cost Drivers Driver Amount for Composite Kayaks Driver Amount for Rotomolded Kayaks
Designing new models Number of models 3 1
Creating and testing prototypes Number of prototypes 6 2
Creating molds for kayaks Number of molds 11 1
Supervising production employees Number of employees 13 12
Curing time Number of days of curing time 15,000 2,000
What amount of overhead should be assigned to each composite kayak using this method? What amount of overhead should be assigned to each rotomolded kayak using this method? (Round cost assigned per unit to 2 decimal places, e.g., 125.25)
Composite Rotomoldad
Total cost assigned $ 650000 $ 194000
Cost assigned per unit $ 650.00 $ 48.50
