Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger

Exercise 9

Product-Costing Accuracy, Consumption Ratios
Plata Company produces two products: a mostly handcrafted soft leather briefcase sold 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 overhead activities, with the following costs:

The controller has collected the expected annual prime costs for each briefcase, the machine hours, the setup hours, and the expected production.

Required:
1. CONCEPTUAL CONNECTION 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. Round to two decimal places.
3. Calculate the overhead cost per unit for each briefcase by using a plantwide rate based on direct labor costs. Round rates to the nearest cent. Comment on this approach to assigning overhead.
4. CONCEPTUAL CONNECTION Calculate the overhead cost per unit for each briefcase by using overhead rates based on machine hours and setup hours. Explain why these assignments are more accurate than using the direct labor costs.