Ghuirani Syabellail Shahiffa/170810301082/Class X

Excercise 4-10

1. Yes, direct labor costs and direct materials costs are accurately traced to each
briefcase because both of them are directly traceable toeach product, so their cost
assignment should be accurate.

2. The consumption ratios for each are as follows:

Elegant Fina
500 4.500
Machining (5.000) = 0,1 (5.000) = 0,9
100 100
Setups (200) = 0,5 (200) = 0,5

$21.000
3. Overhead = = $1,75 per direct labor dollar
$12.000
1,75 × $9.000
Elegant = = $5,25 per briefcase.
3.000
1,75 × $3.000
Fina = = $1,75 per briefcase.
3.000

There are more machine and setup costs assigned to Elegant than Fina.This is clearly
a distortion because the production of Fina is automatedand uses the machine
resources much more than the handcrafted Ele-gant. In fact, the consumption ratio for
machining is 0.10 and 0.90 (using machine hours as the measure of usage). Thus, Fina
uses 9 timesthe machining resources as Elegant. Setup costs are similarly dis-torted.
The products use an equal number of setup hours. Yet if directlabor dollars are used,
then the Elegant briefcase receives three timesmore machining costs than the Fina
briefcase.

$18.000
4. Machine rate = = $3,6 per machine hour.
$5.000
$ 3.000
Setup rate = = $15 per setup hour.
$200

Cost assigned to each product:

Machining: Elegant Fina
$3,6 × 500 $1.800
$3,6 × 4.500 $16.200
Setups:
$15 × 100 1.500 1.500
Total $3.300 $17.700
Units ÷ 3.000 ÷ 3.000
Unit overhead cost $ 1,1 $ 5,9
Products tend to make different demands on overhead activities andthis should be
reflected in overhead cost assignments. Usually thismeans the use of both unit and
nonunit-level activity drivers. In this ex-ample, there is a unit-level activity
(machining) and a nonunit-levelactivity (setting up equipment).