Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 53

ABC and Practical Capacity The ABC Manufacturing Company produces two products, S-101 and C-110. You have obtained the following information regarding the annual manufacturing support (i.e., factory overhead) costs associated with the manufacturing process used to produce these two products:

	Budgeted Costs	Activity Measure (Cost Driver)	Practical Capacity	Budgeted Activities for the Coming Year
Cost Pools				S-101	C-110
Setup activity	$ 250,000	Setup hours	5,000	2,500	2,350
Packing and shipping	$ 50,000	Number of shipments	2,000	1,200	775
Inspection	$ 30,000	Number of batches	1,000	250	700
Machining	$ 750,000	Units produced	150,000	100,000	40,000
Purchase ordering	$ 40,000	Number of orders	300	50	110
Total	$1,120,000

Estimated production for the coming year: S-101 = 100,000 units; C-110 = 40,000 units.

Required

1. Prepare an Excel spreadsheet that would provide ABC allocation rates based on budgeted activity units for the coming year. (a) What is the budgeted manufacturing support cost per unit of S-101? (b) What is the budgeted manufacturing support cost per unit of C-110?

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2. Using your spreadsheet, recalculate the ABC allocation rates, this time based on practical capacity as the denominator activity level. (a) What is the budgeted manufacturing support cost per unit of S-101? (b) What is the budgeted manufacturing support cost per unit of C-110?

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3. Compute, for each cost pool listed above, the difference between the budgeted cost for the year and the total cost allocated to production. How do you interpret these variances (differences)?

Step 1 of 6

Budget is a statement prepared by the management of the business entity which helps them to estimate the expenses, income, receipts, payment, sales and purchases during the period. It is prepared keeping in mind the companies objectives and abilities with respect to resources they have. Often businesses deviate from their budgeted figures either in favourable way or unfavourable way. Such deviations are commonly referred to as variances.