Lyons, SA, Has Identified the Following Overhead Costs and Activity Drivers

question 4

Essay

Lyons, SA., has identified the following overhead costs and activity drivers for next year: $$\begin{array} { l c l c } \text { Overhead Item } & \text { Expected Cost } & \text { Activity Driver } & \text { Expected Qty. } \\\text { Setup costs } & £ 150,000 & \text { Number of setups } & 1,200 \\\text { Ordering costs } & 40,000 & \text { Number of orders } & 10,000 \\\text { Maintenance } & 200,000 & \text { Machine hours } & 16,000 \\\text { Power } & 20,000 & \text { Kilowatt hours } & 100,000\end{array}$$ The following are two of the jobs completed during the year: $\begin{array}{lll}&\underline{\text { Job XX}} &\underline{\text { Job YY} }\\\text { Direct materials } & £ 2,250 & £ 2,500 \\\text { Direct labour } & 3,000 & 1,875 \\\text { Units completed } & 375 & 300 \\\text { Direct labour hours } & 90 & 110 \\\text { Number of setups } & 6 & 8 \\\text { Number of orders } & 8 & 15 \\\text { Machine hours } & 180 & 150 \\\text { Kilowatt hours } & 90 & 120\end{array}$
The company's normal activity is 20,000 direct labour hours.
a.Determine the unit cost for each job using direct labour hours to apply overhead.
b.Determine the unit cost for each job using the four activity drivers. (Round amounts to 2 decimal places.)
c.Which method produces the more accurate cost assignment? Why?

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Definitions:

Probability

Likelihood of occurrence of a particular outcome of an event given all possible outcomes.

Familywise Error

The probability of making one or more false discoveries, or type I errors, when performing multiple hypotheses tests.

Scheffé Test

Statistical procedure used to control familywise error when conducting all possible simple and complex comparisons in a set of data.

Complex Comparisons

Analytical comparisons involving more than two groups.