# calculating cost 1

Assignment 2: Calculating Cost

Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period is \$800,000 and 25,000 hours, respectively. Information about the company’s products follows.

 Standard: Enhanced: Estimated production volume 3,000 units 4,000 units Direct-material cost \$25 per unit \$40 per unit Direct labor per unit 3 hours at \$12 per hour 4 hours at \$12 per hour

Ontario’s overhead of \$800,000 can be identified with three major activities: order processing (\$150,000), machine processing (\$560,000), and product inspection (\$90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively.

Data relevant to these activities follow:

 Orders Processed Machine Hours Worked Inspection Hours Standard 300 18,000 2,000 Enhanced 200 22,000 8,000 Total 500 40,000 10,000

Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed—machinery that was expected to produce significant operating efficiencies.

Using a Microsoft Excel format for calculations, complete the following:

• Assuming use of direct-labor hours to apply overhead to production, calculate the unit manufacturing costs of the standard and enhanced products if the expected manufacturing volume is attained.
• Assuming the use of activity-based costing, calculate the unit manufacturing cost of the standard and enhanced products if the expected manufacturing volume is attained.
• Ontario’s selling price is based heavily on cost:
• Calculate which product is over cost and which is under cost by using direct-labor hours as an application base.
• Explain if it is possible that this over costing and under costing is responsible for the profit issues the company is facing.
• Illustrate how the solution will change if the following data changes:
• The overhead associated with order processing is \$300,000 and the overhead associated with product inspection is \$270,000.