Destin Brass Products Co.
When Activity Based Costing (Weetman, 2010, p. 85) is used to calculate the monthly cost per unit, two types of costs are distinguished. Firstly the direct costs, consisting of the direct manufacturing costs and the run labor costs, and secondly the indirect costs, consisting of the machine usage costs or depreciation and the overhead costs. These costs allow us to calculate the monthly cost per unit, see Appendix 1 for the Excel file of the calculations.
Some minor deviations from the correct cost per unit are possible since the overhead percentages of the packing and shipping given in Exhibit 5 are rounded off and sum up to 99% instead of 100%.
Compare the estimated costs you calculate to existing standard unit costs (Exhibit 3) and the revised unit costs (Exhibit 4). What causes the different product costing methods to produce such different results? The differences in cost can fundamentally be attributed to the difference in accounting methods. In Exhibit 3 Standard Unit Cost is the applied accounting method. In which all overhead is solely allocated as a percentage of the direct labor cost the (overhead rate), In this case 439%. This overhead rate is determined by dividing the total overhead cost by the total cost of labor hours. In which the total overhead cost is determined by summing the costs of machine depreciation, labor, the receiving, materials handling, engineering, packaging/shipping, and the cost of maintenance. This percentage is then directly applied to the direct labor cost of each product. Thus albeit not evenly applied to every product, the overhead cost is proportionately applied to each product in regard to direct labor. Ultimately material cost, direct labor cost, and overhead cost are summed up to determine the standard unit cost of each product (Bruns, 1997, exhibit 3). This causes the pumps to appear relatively expensive in comparison to the other products because this product is relatively labor intense (Bruns, 1997, exhibit 2). Exhibit 4 uses revised unit costs as accounting method. In which the overhead is allocated to a material overhead and another overhead base, based on the machine hours, as well as accounting for the set up labor costs for every run. The material related overhead is determined by dividing the material related overhead by the total material costs, generating a material overhead rate in this case of 48%. The other overhead rate is determined by dividing the total other overhead costs by the total number of machine ours in this case generating of $ 42,59 per machine hour. This results in much of the costs being allocated to Valves instead of Flow Controllers, making the Flow Controllers appear much cheaper (Bruns, 1997, exhibit 4). Unlike standard unit costs as a method of accounting revised unit costs allows the overhead costs to be allocated with respect to the differences in material intense production products and product production heavy in other production assets. Since valves pumps and flow controllers infact do differ, in these regards among others, their respective revised standard costs and standard unit costs differ. The method we decided to use in question one is called activity based pricing, where we allocate the total overhead based on the different activities in manufacturing. When it comes to ABC costing, costs are assigned different activities which in term are allocated to products. This allows overhead costs to be allocated more directly to different units. This is where ABC costing differs from the other costing methods; the overheads are allocated proportionately to the cost drivers of each activity cost pool. Thus in Exhibit 5 we can see the level of "demand" of a specific production activity derived from each individual product. Allowing us to accurately allocate the overhead costs. Given the fact that each of these activities have a...
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