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

Exercise 93

Activity-based costing MedTech, Inc., manufactures and sells diagnostic equipment used in the medical profession. 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 four manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $25 per hour and that there were no beginning inventories. The following information was available for 2010, based on an expected production level of 100,000 units for the year:

Activity (Cost Driver)	Budgeted Costs for 2010	Cost Driver Used as Allocation Base	Cost Allocation Rate
Materials handling Milling and grinding Assembly and inspection Testing	$1,200,000 2,200,000 1,500,000 300,000	Number of parts used Number of machine hours Direct labor hours worked Number of units tested	$ 2.00 per part 11.00 per hour 5.00 per hour 3.00 per unit

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

Units Produced/Tested	Direct Materials Costs	Number of Parts Used	Machine Hours	Direct Labor Hours
10,000	$900,000	62,000	18,000	35,000

Required:

a. Calculate the total manufacturing costs and the cost per unit produced and tested during the month of August for MedTech, Inc.

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b. Explain the advantages of the ABC approach relative to using a single predetermined overhead application rate based on direct labor hours. (Note: You do not have to calculate the overhead that would be applied for the month of August using this alternative method.)

Step 1 of 4

Activity–based costing:

Activity base costing provides alternative methods by basis of activities and rendered services that guide us achieve more appropriate allocated overhead cost.

Activity base costing emphasizes the need to obtain a better understanding of the behavior of overhead costs.

The ABC costing identifies the cost driver for each activity. This system gives more accurate results than the traditional method of costing.