Managerial Accounting: Predetermined Overhead Rate and Product Costing

This article discusses Predetermined Overhead Rate and Traditional and Activity Based Product Costing in Managerial Accounting. It highlights the importance of ABC information and future strategy for the company. The article also provides recommendations based on the analysis of the costing systems.

MANAGERIAL ACCOUNTING
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Predetermined Overhead Rate
Total overhead manufacturing cost incurred by the company = $ 2,700,000
Direct labor hours per R2D2 model = 2
Direct labor hours per BB8 model = 3
Unit production of R2D2 model annually = 30000
Unit production of BB8 model annually = 5000
Total direct labor hours annually = 30000*2 + 5000*3 = 75,000
Let the overhead manufacturing cost per unit direct labor cost be $X
Hence, 75000X = 2,700,000
Solving the above, X = $36
Traditional Product Costing
One of the key requirement is to highlight the product cost for the two products manufactured by
the company in accordance with the traditional costing method whereby the manufacturing
overhead is assigned as per the direct labor hours used in the manufacturing of the two respective
products (Drury, 2016).
Overhead cost per unit R2D2 = 36*2 = $72
Also, overhead cost per unit BB8 = 36*3 = $108
The unit costing of the two products is shown below.
PARTICUALRS R2D2 BB8
Direct Materials $75 $120
Direct Labor $36 $54

Manufacturing Overhead $72 $108
UNIT PRODUCT COST $183 $282
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Activity Based Product Costing
Unlike the traditional costing, in case of activity based costing, the manufacturing overhead is
allocated on the basis of the respective activities that constitute the overhead cost. This is
indicated below (Heisinger, 2016).
Unit production of R2D2 model annually = 30000
Unit production of BB8 model annually = 5000
Unit overhead manufacturing cost for R2D2 = 1224000/30000 = $40.80
Unit overhead manufacturing cost for BB8 = 1476000/5000 = $ 295.20
The unit costing of the two products is shown below.

PARTICUALRS R2D2 BB8
Direct Materials $75 $120
Direct Labor $36 $54
Manufacturing Overhead $40.8 $295.2
UNIT PRODUCT COST $151.8 $469.2
Recommendation
From the above computation, it is apparent that as per the traditional costing system, there is
over-application of overhead cost of R2D2 model and under-application of overhead cost of BB8
model. As a result, the current pricing of R2D2 model is on the higher side owing to which the
company is losing to competitors. On the other hand, the current selling price of BB8 is
significantly lower than the actual cost price due to which the other companies are not able to
compete. Further, considering that BB8 is being sold at a loss, hence it is selling without any
effort. Hence, it would not be recommended to increase the sales of BB8 since the actual sales at
the correct price would be significantly lower (Kinney & Rainborn, 2012).
Future Strategy
Going forward, it is imperative that the company needs to adopt the activity based costing system
and replace the traditional costing system. This would ensure that the costing of the two products
is done correctly and hence would lead to competitive pricing of the two products. The net result
would be that both the products would be profitable (Emmauel & Otley, 2015).
Usage of ABC Information
The ABC information is highly relevant for the company considering that it can enable the
company to correct the pricing of the two models which would result in better competitiveness in
the market and also improve the decision making of the company with regards to production and
pricing related decisions (Drury, 2016).

References
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York:
Cengage Learning
Emmauel, R.C. & Otley, T.D. (2015) Accounting for Management Control. 8th ed. London:
Cengage Learning.
Heisinger, K.(2016) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
Kinney, R. M. & Rainborn , A. C. (2012) Cost Accounting: Foundations and Evolutions. 9th ed.
New York: Cengage Learning.