UCF-ACG2071 Ch. 4 Activity Based Costing

UCF-ACG2071 Ch. 4 Activity Based Costing - In Class Example...

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In Class Example Solutions - Chapter 4 - Activity Based Costing, Lean Production and Cost of Quality EXAMPLE #1 Req. 1 Manufacturing Overhead Machine Hours Plantwide Overhead Rate \$3,762,000 ÷ 17,100 = \$220 per machine hour Req. 2 Production Departments Departmental Manufacturing Overhead Machine Hours Departmental Overhead Rates Potato Chips \$2,147,000 ÷ 11,300 = \$190 per machine hour Corn Chips \$959,000 ÷ 2,600 = \$368.85 (rounded) per machine hour Cheese Puffs \$ 656,000 ÷ 3,200 = \$205 per machine hour TOTAL \$3,762,000 17,100 Req. 3 Potato Chip Overcosted Corn Chip Undercosted Cheese Puffs Overcosted EXAMPLE #2 Req. 1 First, compute the current plant-wide manufacturing overhead rate: Total manufacturing overhead Total direct labor hours Plant-wide overhead rate \$800,000 ÷ 25,000 = \$32 per direct labor hour Then, apply it to the two products: Manufacturing Cost Medium (42-inch) Large (63 inch) Direct materials \$ 660,000 \$1,240,000 Direct labor 216,000 384,000 Manufacturing overhead: ( 9,000 DL hours × \$32) = 288,000 (16,000 DL hours × \$32) = 512,000 Total manufacturing cost \$1,164,000 \$2,136,000 Number of units produced ÷ 3,000 ÷ 4,000 Cost per unit \$ 388 \$ 534 1

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Req. 2 First, compute the activity cost allocation rates: Activity Manufacturing overhead related to activity Total activity allocation base Activity allocation rate Materials handling \$150,000 ÷ 500 a material orders handled = \$300 per material order handled Machine processing 560,000 ÷ 40,000 b machine hours = \$14 per machine hour Packaging 90,000 ÷ 10,000 c packaging hours = \$9 per packaging hour You must use the TOTAL activity for the year as follows. Since Owens only manufactures two products, you add the activity of each of the individual products to find the total activity: a 300 + 200 = 500 b 20,000 + 20,000 = 40,000 c 4,000 + 6,000 = 10,000 Then, apply them to the two products: Manufacturing Cost Medium (42- inch) Large (63 inch) Direct materials \$ 660,000 \$1,240,000 Direct labor 216,000 384,000 Manufacturing overhead: Medium: (300 material orders × \$300 = \$90,000) (20,000 machine hours × \$14 = \$280,000) (4,000 packaging hours ×\$9 = \$36,000) Total allocation of overhead 406,000 Large: (200 material orders × \$300 = \$60,000) (20,000 machine hours × \$14 = \$280,000) (6,000 packaging hours × \$9 = \$54,000) Total allocation of overhead 394,000 Total manufacturing cost \$1,282,000 \$2,018,000 Number of units produced ÷ 3,000 ÷ 4,000 Cost per unit \$ 427.33 \$ 504.50 Req. 3 Medium Large Cost per unit using current system \$ 388.00 \$ 534.00 Cost per unit using ABC 427.33 504.50 Overcosting / (Undercosting) (\$ 39.33) \$ 29.50 Number of units × 3,000 × 4,000 Total cost distortion (\$117,990 )* \$118,000 * * The \$10 difference between the total amount overcosted and
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