Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows:

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $600 per labor hour.
What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 460 parts, 5 direct manufacturing labor hours, and 18 minutes of inspection time.
A) $6.00 per remote control
B) $13.30 per remote control
C) $32.00 per remote control
D) $1,330.00 per remote control

Question

Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows:

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $600 per labor hour.
What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 460 parts, 5 direct manufacturing labor hours, and 18 minutes of inspection time.
A) $6.00 per remote control 
B) $13.30 per remote control 
C) $32.00 per remote control 
D) $1,330.00 per remote control

Quizplus · Accepted Answer

Cost per batch = ($2 × 460) + ($10 × 5) + ($20 × 18) = $1,330.00 per batch
Cost per remote control = $1,330.00 per batch ÷ 100 units per batch = $13.30 per unit