abc costing

Topics: Costs, Lean manufacturing, Price Pages: 28 (1896 words) Published: November 9, 2013
Exercises (Group A)
(15-20 min.) E 4-22A
Req. 1
Plantwide
overhead rate

=

Estimated total manufacturing costs
Estimated cost allocation base

=
=

$1,150,000
25,000* direct labor hours

=
=

$46 per direct labor hour

*When calculating plantwide overhead rates, all direct labor hours incurred in the plant are used.

(continued) E 4-22A
Req. 2
Departmental overhead rate

Machining Dept. overhead rate

=
=

Finishing Dept. overhead
rate

Total department overhead
Cost allocation base (estimated)

=

$825,000
13,750 machine hours
$60 per machine hour

$325,000
13,000** direct labor hours

=
=

$25 per direct labor hour

**When calculating the finishing departmental rate, only the direct labor hours incurred in the finishing department are used.
Req. 3
Overhead allocation based on single, plantwide rate:
Cost allocation base (actual)
× Plantwide cost allocation
rate
Overhead allocation

Job 450
5 DL hours

Job 455
5 DL hours

× $46/ DL hour
$ 230

× $46 / DL hour
$ 230

Req. 4
Overhead allocation based on departmental rates:
Job 450
Machining Department:
Departmental allocation rate
× Machine hours used by Job
Overhead allocation

×

$60/ MH
3 MH
$180

Job 455

×

$60/ MH
6 MH
$360

1

Finishing Department:
Departmental allocation rate
× DL hours used by Job
Overhead allocation
Total overhead allocation (from
both departments

$25/ DL hr
4 DL hrs
$100

$25/ DL hr
× 3 DL hrs
$75

$ 280

×

$ 435

Req. 5
The single plantwide rate undercosts Job 450 and undercosts Job 455. Since Donovan sets the sales price at 125% of cost, and the job cost is affected by the allocation system used, the sales price will be affected by the allocation system used.

(15-20 min.) E 4-23A
Req. 1
West Horizon
Computation of Cost Allocation Rates

Activity
Materials handling
Machine setup
Insertion
Finishing

Total Activity
Overhead (est.)
$13,200
$ 5,200
$49,500
$86,100

÷
÷
÷
÷

Cost Allocation Base
(est.)
3,300 parts
20 setups
3,300 parts
2,100 hours

=
=
=
=

Activity
Overhead Rate
$ 4 per part
$260 per setup
$ 15 per part
$ 41 per hour

Req. 2
The amount of manufacturing overhead to be assigned to Job 420 is computed as follows: Activity
Materials handling
Machine setup
Insertion of parts
Finishing
Total

MOH Cost
$ 400
780
1,500
5,740
$8,420

Req. 3
The amount of manufacturing overhead to be assigned to Job 510 is computed as follows: Activity
Materials handling
Machine setup
Insertion of parts
Finishing
Total

MOH Cost
$ 1,700
1,560
6,375
14,350
$23,985

(15-20 min.) E 4-24A

2

Req. 1
Total overhead
Total machine hours
Predetermined MOH rate

$ 790,000
10,000
$
79

Cost of Job #356
Machine hours used
POHR
Total MOH

$

Job #356—traditional POHR
Direct material
Direct labor
MOH

100
79
7,900

300 lbs. @ $50/lb.
55 hrs. @ $20/hr.

Total cost of job

$ 15,000
1,100
7,900
$ 24,000

(continued) E 4-24A
Req. 2
Job #356—ABC
Direct material
Direct labor
Machine hours
No. of engineering changes
Pounds of hazardous waste
generated

300 lbs. @ $50/lb.
55 hrs. @ $20/hr.
100
6
50

$ 15,000
1,100
2,500
360
15,000

Total cost of job

$ 33,960

Req. 3
The estimate based on the activity-based costing (ABC) method provides more useful information. Activity-based costing (ABC) focuses on activities, rather than departments, as the fundamental cost objects. ABC recognizes that activities are costly to perform, and each product manufactured may require different types and amounts of activities. Thus, activities become the building blocks for compiling the indirect costs of products, services, and customers. Managers use ABC to more accurately estimate the cost of resources required to produce different products, to render different services, and to serve different customers.

(15-20 min) E 4-25A
Req. 1...
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