Fisico company produces exercise bikes. One of its plants produce two version a standard model and a deluxe model. The deluxe model has a wider and stander base and a variety of electronic gadget to help the exercise monitor heartbeat, calories burned, distance traveled, etc. at beginning of the year the following data were prepared for this plants calculate the cost per unit for each product using direct labor hours to assign all overhead costs Determine the overhead cost per unit. what are the total costs per unit? If required round your final answer to the nearest cent Compare these costs with these calculated using the unit based method which cost is the most accurate?
The Correct Answer and Explanation is :
To calculate the cost per unit for each product using direct labor hours to assign all overhead costs, we’ll need to follow a few steps. I’ll break them down for you:
Step 1: Gather the Data
For simplicity, I’ll create hypothetical data, as no data was provided in the question. Let’s assume the following for the Fisico Company:
- Total Overhead Costs: $100,000
- Total Direct Labor Hours (DLH): 20,000 hours
- Direct Labor Hours per Unit:
- Standard Model: 2 hours per unit
- Deluxe Model: 3 hours per unit
- Units Produced:
- Standard Model: 5,000 units
- Deluxe Model: 3,000 units
Step 2: Calculate the Overhead Rate per Direct Labor Hour (DLH)
First, we need to calculate the overhead rate per direct labor hour: Overhead Rate=Total Overhead CostsTotal Direct Labor Hours\text{Overhead Rate} = \frac{\text{Total Overhead Costs}}{\text{Total Direct Labor Hours}} Overhead Rate=100,00020,000=5 per hour\text{Overhead Rate} = \frac{100,000}{20,000} = 5 \text{ per hour}
This means that for each direct labor hour worked, the company incurs $5 in overhead costs.
Step 3: Apply Overhead to Each Model
Now, we will apply this overhead rate to each model based on the number of direct labor hours required to produce each unit.
- Standard Model:
- Overhead per unit = 2 hours × $5 = $10
- Deluxe Model:
- Overhead per unit = 3 hours × $5 = $15
Step 4: Determine Total Costs per Unit
Now, we calculate the total costs for each unit by adding direct materials, direct labor, and overhead. Let’s assume:
- Direct Materials Cost per Unit:
- Standard Model: $50
- Deluxe Model: $80
- Direct Labor Cost per Unit:
- Standard Model: $30 (2 hours × $15/hour)
- Deluxe Model: $45 (3 hours × $15/hour)
So, the total cost per unit for each model is:
- Standard Model Total Cost: Total Cost=Direct Materials+Direct Labor+Overhead\text{Total Cost} = \text{Direct Materials} + \text{Direct Labor} + \text{Overhead} Total Cost=50+30+10=90\text{Total Cost} = 50 + 30 + 10 = 90
- Deluxe Model Total Cost: Total Cost=80+45+15=140\text{Total Cost} = 80 + 45 + 15 = 140
Step 5: Compare with Unit-Based Costing
Unit-based costing assigns overhead based on the number of units produced instead of labor hours. For simplicity, let’s assume that under unit-based costing, the overhead is allocated equally across all units.
- Total Units Produced: 5,000 (Standard) + 3,000 (Deluxe) = 8,000 units
- Overhead per Unit: $100,000 ÷ 8,000 units = $12.50 per unit
Now, calculate the total costs under unit-based costing:
- Standard Model Total Cost (Unit-Based): Total Cost=50+30+12.50=92.50\text{Total Cost} = 50 + 30 + 12.50 = 92.50
- Deluxe Model Total Cost (Unit-Based): Total Cost=80+45+12.50=137.50\text{Total Cost} = 80 + 45 + 12.50 = 137.50
Conclusion:
- Using Labor Hours to Assign Overhead:
- Standard Model: $90
- Deluxe Model: $140
- Using Unit-Based Method:
- Standard Model: $92.50
- Deluxe Model: $137.50
Which is More Accurate?
The method of assigning overhead based on direct labor hours is more accurate because it considers the actual resource usage for each product. The deluxe model, which requires more labor time, appropriately bears more overhead. On the other hand, the unit-based method assigns equal overhead to each unit, regardless of how much labor or resources are consumed. Thus, the labor-hour method better reflects the true cost of each product.
In summary, assigning overhead based on direct labor hours provides a more precise and realistic cost per unit, especially when production processes differ significantly between models.