Activity Based Costing

Activity Based Costing

IE Department Manufacturing Makes two Products (A and B). The management decides to use the following Activities and Cost Drivers. Activities Cost/year Cost Driver Consumption of Cost Driver per year Purchasing, Storage and material handling S 250,000 Raw material cost $ 1,000,000 Engineering and Product Design $ 300,000 Hours in design 5,000 hours Set up Costs $ 100,000 Number of setups 1,000 setups $ 300,000 M/c. Depreciation and maintenance Machine hours 100.000 hours $ 250,000 Factory depreciation taxes insurance and utilities Machine hours 100,000 hours Other manufacturingS 200,000 overhead costs Machine hours 100,000 hours Total S 1,400,000 The requirements of two of the products (A and B) are as follows: Product A (per 15,000 units) Product B (per 10,000 units) 50 hours Direct Labor Hours Raw-Material cost Hours in Design Set ups Machine hours 24 hours $ 36,000 25 S 50,000 30 24

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IE Department Manufacturing Makes two Products (A and B). The management decides to use the following Activities and Cost Drivers. Activities Cost/year Cost Driver Consumption of Cost Driver per year Purchasing, Storage and material handling S 250,000 Raw material cost $ 1,000,000 Engineering and Product Design $ 300,000 Hours in design 5,000 hours Set up Costs $ 100,000 Number of setups 1,000 setups $ 300,000 M/c. Depreciation and maintenance Machine hours 100.000 hours $ 250,000 Factory depreciation taxes insurance and utilities Machine hours 100,000 hours Other manufacturingS 200,000 overhead costs Machine hours 100,000 hours Total S 1,400,000 The requirements of two of the products (A and B) are as follows: Product A (per 15,000 units) Product B (per 10,000 units) 50 hours Direct Labor Hours Raw-Material cost Hours in Design Set ups Machine hours 24 hours $ 36,000 25 S 50,000 30 24

Expert Answer

 

Solution:

(A) Calculation of overhead cost per unit of products A and B using Activity based costing

Activities Cost per unit of Cost Driver (Refer Note 1) Cost per 15,000 Units of Product A Cost per 10,000 Units of Product B
Purchasing, Storage and material handling $0.25 $12,500

(50,000*0.25)

$9,000

(36,000*0.25)

Engineering and Product Design $60.00 $600

(10*60)

$1,500

(25*60)

Set up Costs $100.00 $300

(100*3)

$500

(100*5)

M/c Depreciation and maintenance $3.00 $90

(3*30)

$72

(3*24)

Factory depreciation taxes insurance and utilities $2.50 $75

(2.5*30)

$60

(2.5*24)

Other manufacturing overhead cost $2.00 $60

(2*30)

$48

(2*24)

$13,625 $11,180
Total: $1,400,000 Per Year $13,625 $11,180
for 15,000 Units for 10,000 Units
Overhead cost per unit (Use 3 decimal place) $0.908

(13,625 / 15,000)

$1.118

(11,180 / 10,000)

Note 1 — Cost per unit of cost driver

Activities Cost/year Cost Driver Consumption of Cost Driver per year Cost per unit of Cost Driver (Cost per year / Consumption of Cost Driver Per Year)
Purchasing, Storage and material handling $250,000 Raw material cost $1,000,000 $0.25
Engineering and Product Design $300,000 Hours in design 5000 Hours $60.00
Set up Costs $100,000 Number of setups 1,000 Setups $100.00
M/c Depreciation and maintenance $300,000 machine hours 100,000 hours $3.00
Factory depreciation taxes insurance and utilities $250,000 machine hours 100,000 hours $2.50
Other manufacturing overhead cost $200,000 machine hours 100,000 hours $2.00
Total $1,400,000

(B) Overhead Cost per unit of Products A and B, based on direct labor hours.

Total Direct Labor Hours per year = $3,500 DLHs

Total Estimated Overheads per year = $1,400,000

Overhead Cost per Direct Labor Hour = Total Estimated Overheads per year $1,400,000 / Total Direct Labor Hours per year $3,500 DLHs

= $400 per DLH

Overhead Cost per direct labor hour = $400.00 per hour

Product A

Overhead Cost per Unit for Product A = (Direct Labor Hours for Product A 50 Hours x Overhead Rate $400 per DLH) / 15,000 Units

= $20,000 / 15,000 Units

= $1.33 per unit of product A

Product B

Overhead Cost per Unit for Product B = (Direct Labor Hours for Product B 24 Hours x Overhead Rate $400 per DLH) / 10,000 Units

= $9,600 / 10,000 Units

= $0.96 per unit of product B

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