Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 95

Activity-based costing versus traditional overhead allocation methodsGalvaset Industries manufactures and sells custom-made windows. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $20 per hour and that there were no beginning inventories. The following information was available for 2010, based on an expected production level of 50,000 units for the year, which will require 200,000 direct labor hours:

Activity (Cost Driver)	Budgeted Costs for 2010	Cost Driver Used as Allocation Base	Cost Allocation Rate
Materials handling Cutting and lathe work Assembly and inspection	$ 325,000 2,340,000 5,000,000	Number of parts used Number of parts used Direct labor hours	$ 0.25 per part 1.80 per part 25.00 per hour

The following production, costs, and activities occurred during the month of March:

Units Produced	Direct Materials Costs	Number of Parts Used	Direct Labor Hours
3,800	$142,000	83,600	17,180

Required:

a.Calculate the total manufacturing costs and the cost per unit of the windows produced during the month of March (using the activity-based costing approach).

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b. Assume instead that Galvaset Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity-based costing system previously described). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of March. (Hint: You will need to calculate the predetermined overhead application rate using the total budgeted overhead costs for 2010.)

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c. Compare the per unit cost figures calculated in parts a and b. Which approach do you think provides better information for manufacturing managers? Explain your answer.

Step 1 of 4

Contribution margin income statement:

Contribution margin is the profit earned for each unit sold. It is calculated by deducting variable expenses of the product from the sales generated by that product. Net income or loss is calculated by deducting fixed expenses from the contribution amount.

Break-even point:

Break-Even point is a point where the position of the organization is neither it incurs any loss nor generates any profit. It is calculated by the organization to know the level of sale, which starts generating profits.