Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 41

Activity-Based Costing, Cost Flow Diagram, and Predetermined Overhead Rates

Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller's staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool:

Cost Pools	Costs	Activity Drivers
Incoming inspection	$ 85,000	Direct material cost
Production	750,000	Machine-hours
Machine setup	350,000	Setups
Shipping	240,000	Units shipped

The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM:

	Products
	308	510
Total direct material costs	$25,000	$ 9,000
Total direct labor costs	$83,000	$99,000
Total machine-hours	60,000	90,000
Total number of setups	50	90
Total pounds of material	18,000	9,000
Total direct labor-hours	6,000	9,000
Number of units produced and shipped	30,000	18,000

Required

a.The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?

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b.A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant?

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c.What unit product costs will be reported for the two products if the ABC system suggested by the cost accountant's classification of cost pools is used?

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d.If management should decide to implement an activity-based costing system, what benefits should it expect?

Step 1 of 4

a.??

Burden rate = (Total overhead costs ÷ Budgeted total machine-hours)

Budgeted total machine-hours = 60,000 + 90,000 = 150,000 hours

Total overhead costs = $85,000 +$750,000 + $350,000 + $240,000= $1,425,000

Burden rate = $1,425,000 ÷ 150,000 macine-hours = $9.50 per machine-hour

Unit costs:

	308	510
Direct costs	$108,000	$108,000
Overhead (@ $9.50 per machine-hour)	570,000	855,000
Total costs	$678,000	$963,000
Number of units	30,000	18,000
Unit cost	$22.60	$53.50