Activity-based costing versus traditional overhead allocation methods.
ZZY Industries manufactures and sells custom-made dining tables. 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 three manufacturing
overhead cost drivers (activities). Assume that the direct labor rate
is $15 per hour and that there were no beginning inventories. The
following information was available for 2004, based on expected
production level of 50,000 units for the year:
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Activity Budgeted Cost Driver Used Cost
(Cost Driver) Costs for 2004 as Allocation Base Allocation Rate
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Materials handling $ 250,000 Number of parts used $ 0.20 per part
Cutting and lathe work 1,750,000 Number of parts used 1.40 per part
Assembly and inspection 4,000,000 Direct labor hours 20.00 per hour
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The following production, costs, and activities occurred during the month of July:
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Units Direct Number Direct
Produced Materials Costs of Parts Used Labor Hours
3,200 $107,200 70,400 13,120
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Questions:
1) Calculate the total manufacturing cost and the cost per unit of the
dining tables produced during the month of July (Using the
activity-based costing approach).
2) Assume instead that ZZY Industries applies manufacturing overhead
on a direct labor hours basis (rather than using the activity-based
costing system described above). Calculate the total manufacturing
cost and the cost per unit of the coffee tables produced during the
month of July. (Hint: You will need to calculate the predetermined
overhead application rate using the total budgeted overhead costs for
2004.)
3) Compare the per unit cost figures calculated in parts (1) and (2)
above. Which approach do you think provides better information for
manufacturing managers? |
