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ACCT 556-The new president of the Wernecke Company

AC556Week 1 ProblemABC CostingNOTE: It is expected that this problem will be completed using an Excel spreadsheetusing formulas. Please see the Excel Tutorial that is available under the course home tab.The new president of the Wernecke Company was stumped. Why had profits gone down?He had directed the sales department to push the product with the highest contributionmargin, and the sales department had come through with flying colors. The percent offlams sold had increased from 25% of units sold to 37.5% of units sold. So whathappened?Sales Price per UnitDirect Materials per UnitDirect Labor Cost per HourDirect Labor Hours per UnitNumber of Units Produced Flims$150$75$251 hour per unit25,000 Flams$500$200$255 hours per unit15,000 The variable overhead for the coming year is estimated to be $3,000,000.Required:1. Calculate the Wernecke Company’s estimated direct labor hours to produce flimsand flams.2. Calculate the predetermined variable overhead rate that will be used in the comingyear using a traditional costing system based upon direct labor hours.3. Using a traditional costing system based upon direct labor hours, compute the unitproduct costs for flims and flams as well as contribution margin per unit.4. It has been suggested to the president to consider the use of an ABC costingsystem to allocate manufacturing overhead. Engineering studies have revealed thefollowing information about estimated manufacturing activities for the comingyear.Activity Cost PoolEstimated Overhead Expected ActivityCostLevelSetups$850,000200 setupsScrap$350,000500 unitsTesting$200,0005,000 testsMachine related$1,600,000100,000 MhrsTotal$3,000,000Calculate the separate predetermined overhead rates for each of the activitieslisted above. 5. The following data is available about the activity levels needed to produce theprojected 25,000 units of Flims:Activity Cost Pool Estimated ActivityLevel for FlimsSetups50 setupsScrap200 unitsTesting2,000 testsMachine related12,500 Mhrs.Calculate the expected variable overhead to be applied to Flims.6. The following data is available about the activity levels needed to produce theprojected 15,000 units of Flams:Activity Cost Pool Estimated ActivityLevel for GadgetsSetups150 setupsScrap300 unitsTesting3,000 testsMachine related87,500 Mhrs.Calculate the expected variable overhead to be applied to Flams.7. Calculate the total overhead (total for company) that is expected to be applied toFlims and Flams.8. Calculate the projected unit costs and unit contribution margins for Flims andFlams using ABC costing.9. What conclusions can you drawn about the use of traditional costing vs. ABCcosting for the Wernecke Company? What recommendations do you have for thepresident?

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