Baja Industries has recently switched its method of applying manufacturing overhead from a single predetermined overhead rate based on direct labor hours to activity-based costing (ABC). Assume that the direct labor rate is $18.00 per hour and that there were no beginning inventories. The following cost drivers and rates have been developed for allocating manufacturing overhead costs: $\begin{array}{lll}
\underline{\text { Activity }} & \underline{ \text { Cost Driver} } & \underline{ \text { Rate }}\
\text { Material handling } & \text { Number of parts used } & \$ 2.00 \text { per part } \
\text { Assembly and inspection } & \text { Number of direct labor hours } & \$ 25.00 \text { per DLH } \
\text { Testing } & \text { Number of units tested } & \$ 5.00 \text { per unit }
\end{array}$
The following production, costs, and activities occurred during the month of August: (a.) Calculate the total manufacturing cost and the cost per unit for the month of August.
(b.) Assume instead that Baja Industries applies manufacturing overhead on the basis of $40.00 per direct labor hours (rather than the ABC method). Calculate the total manufacturing overhead cost applied for the month of August.
(c.) Which method of applying overhead do you think provides better information for manufacturing managers?

Question

Baja Industries has recently switched its method of applying manufacturing overhead from a single predetermined overhead rate based on direct labor hours to activity-based costing (ABC). Assume that the direct labor rate is $18.00 per hour and that there were no beginning inventories. The following cost drivers and rates have been developed for allocating manufacturing overhead costs: $\begin{array}{lll}
 \underline{\text { Activity }} & \underline{ \text { Cost Driver} } & \underline{ \text { Rate }}\
\text { Material handling } & \text { Number of parts used } & \$ 2.00 \text { per part } \
\text { Assembly and inspection } & \text { Number of direct labor hours } & \$ 25.00 \text { per DLH } \
\text { Testing } & \text { Number of units tested } & \$ 5.00 \text { per unit }
\end{array}$
 The following production, costs, and activities occurred during the month of August:  (a.) Calculate the total manufacturing cost and the cost per unit for the month of August.
(b.) Assume instead that Baja Industries applies manufacturing overhead on the basis of $40.00 per direct labor hours (rather than the ABC method). Calculate the total manufacturing overhead cost applied for the month of August.
(c.) Which method of applying overhead do you think provides better information for manufacturing managers?

Quizplus · Accepted Answer

The Answer of Baja Industries has recently switched its method of applying manufacturing overhead from a single predetermined overhead rate based on direct labor hours to activity-based costing (ABC). Assume that the direct labor rate is $18.00 per hour and that there were no beginning inventories. The following cost drivers and rates have been developed for allocating manufacturing overhead costs: $\begin{array}{lll}
 \underline{\text { Activity }} & \underline{ \text { Cost Driver} } & \underline{ \text { Rate }}\
\text { Material handling } & \text { Number of parts used } & \$ 2.00 \text { per part } \
\text { Assembly and inspection } & \text { Number of direct labor hours } & \$ 25.00 \text { per DLH } \
\text { Testing } & \text { Number of units tested } & \$ 5.00 \text { per unit }
\end{array}$
 The following production, costs, and activities occurred during the month of August:  (a.) Calculate the total manufacturing cost and the cost per unit for the month of August.
(b.) Assume instead that Baja Industries applies manufacturing overhead on the basis of $40.00 per direct labor hours (rather than the ABC method). Calculate the total manufacturing overhead cost applied for the month of August.
(c.) Which method of applying overhead do you think provides better information for manufacturing managers?

Baja Industries Has Recently Switched Its Method of Applying Manufacturing