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3. How does Wilkersons existing cost system operate?
Develop a diagram to show how costs flow from factory
expense accounts to products.
The approach to this question was to:
Illustrate a process flow diagram of the current system
Show how cost assignments are calculated in the current
system
1) Currently,
direct labour
costs were used
to assume
manufacturing
overheads (MOH)
i.e. if direct labour
increases, so does
manufacturing
overhead. This
cost assignment
process therefore
does not reflect
the real costs
incurred as
opposed to when
Production
Departme
nt
Valves
Pumps
Flow
Control
lers
MOH
Cost
Assignm
ent
($30)
MOH
Cost
Assignm
ent
($37.50)
MOH
Cost
Assignm
ent
($30)
Finished
Products
Selling,
General &
Administra
tive
Expenses
2) This is
therefore the
incorrect cost
allocation;
e.g. for flow
controllers
where direct
labour per
unit is $10
(the lowest
out of all
products),
they assume
manufacturin
g overhead
per unit is
$30 (300% x
$10) (see
Cost
Assignme
nt
(Pump)
Cost
Assignme
nt (Flow
Controll
ers)
Units
Produced
: 7,500
Units
Produced
: 12,500
Units
Produced
: 4,000
Direct
Labour
per unit
($10)
Direct
Material
per unit
($16)
$75,0
00
$120,
000
Manufac
turing
Overhea
d per
unit
($30)
$225,
000
Direct
Labour
per unit
($12.50)
Direct
Material
per unit
($20)
$156,
250
$250,
000
Manufac
turing
Overhea
d per
unit
($37.50)
$468,
750
Direct
Labour
per unit
($10)
Direct
Material
per unit
($22)
$40,0
00
$88,0
00
Manufac
turing
Overhea
d per
unit
($30)
$120,
000
x
x
x
300%
300%
300%
In the current system, direct labour, direct material, and MOH are
calculated by taking the number of units produced and multiplying it by
cost per unit. MOH per unit is calculated by assuming 300% of direct labour
Product
Valves
Pumps Flow
Total
Control
lers
No. of Units
12500
4000
Direct Labor
7500
$75,000
$156,2
50
$40,000 $271,250
Direct
Material
$120,00
0
$250,0
00
$88,000 $458,000
Total Direct
Costs
$195,00
0
$406,2
50
$128,00 $729,250
0
Overhead
Costs (300%
of DL)
$225,00
0
$468,7
50
$120,00 $813,750
0
Total Cost
Allocation
$420,00
0
$875,0
00
$248,00 $1,543,00
0
0
24000