Two-Stage ABC for Manufacturing
Detroit Foundry, a large manufacturer of heavy equipmentcomponents, has determined the following activity cost pools andcost driver levels for the year:
Activity Cost Pool Activity Cost Activity Cost Driver
Machine setup $672,000 12,000 setup hours
Material handling 192,000 2,000 materialmoves
Machine operation 500,000 10,000 machine hours
The following data are for the production of single batches oftwo products, C23 Cams and U2 Shafts during the month ofAugust:
C23 Cams U2 Shafts Units produced 500 300 Machine hours 4 5 Direct labor hours 200 400 Direct labor cost $11,000 $16,000 Direct materials cost $36,000 $26,000 Tons of materials 13 8 Setup hours 3 7
Determine the unit costs of C23 Cams and U2 Shafts usingABC.
Round cost per gallon to two decimal places.
Product Costs C23 Cams U2 Shafts Direct materials $Answer $Answer Direct labor Answer Answer Manufacturing overhead: Machine setups Answer Answer Material handling Answer Answer Machine operation Answer Answer Total job costs $Answer $Answer Units produced Answer Answer Cost per unit produced $Answer $Answer
Two-Stage ABC for Manufacturing
Detroit Foundry, a large manufacturer of heavy equipmentcomponents, has determined the following activity cost pools andcost driver levels for the year:
| Activity Cost Pool | Activity Cost | Activity Cost Driver | |
|---|---|---|---|
| Machine setup | $672,000 | 12,000 setup hours | |
| Material handling | 192,000 | 2,000 materialmoves | |
| Machine operation | 500,000 | 10,000 machine hours | |
The following data are for the production of single batches oftwo products, C23 Cams and U2 Shafts during the month ofAugust:
| C23 Cams | U2 Shafts | |
|---|---|---|
| Units produced | 500 | 300 |
| Machine hours | 4 | 5 |
| Direct labor hours | 200 | 400 |
| Direct labor cost | $11,000 | $16,000 |
| Direct materials cost | $36,000 | $26,000 |
| Tons of materials | 13 | 8 |
| Setup hours | 3 | 7 |
Determine the unit costs of C23 Cams and U2 Shafts usingABC.
Round cost per gallon to two decimal places.
| Product Costs | ||
|---|---|---|
| C23 Cams | U2 Shafts | |
| Direct materials | $Answer | $Answer |
| Direct labor | Answer | Answer |
| Manufacturing overhead: | ||
| Machine setups | Answer | Answer |
| Material handling | Answer | Answer |
| Machine operation | Answer | Answer |
| Total job costs | $Answer | $Answer |
| Units produced | Answer | Answer |
| Cost per unit produced | $Answer | $Answer |
Related questions
Bunker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow:
| Fabric Case | Leather Case | |||
| Number of labor hours | 12,000 | 11,000 | ||
| Number of material moves | 483 | 667 | ||
| Number of setups | 42 | 38 | ||
Total estimated overhead costs are $135,000, of which $115,000 is assigned to the materials handling cost pool and $20,000 is assigned to the setup cost pool.
Required:
1. Calculate the overhead assigned to the fabric case using the traditional costing system based on direct labor hours. (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)
2. Calculate the overhead assigned to the fabric case using ABC. (Round activity rates or activity proportions, and intermediate calculations to four decimal places.)
3. Was the fabric case over- or undercosted by the traditional cost system compared to ABC?
Section IV: Alternative Costing Method
Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor: $8.00
In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:
Stick | Collapsible | |
Units Sold | 60,000 | 3,000 |
Selling Price | $12.50 | $14.00 |
Direct Material Cost per Unit | $3 | $3.10 |
Direct Labor Cost per Hour | $7.50 | $8.00 |
Variable Manufacturing Overhead | $0.40 | $0.40 |
Variable Selling Costs | $1.10 | $1.10 |
Labor Hours per Unit | 0.2 | 0.2 |
Sales Orders | 120 | 1 |
Purchase Orders | 50 | 3 |
Production Runs | 45 | 6 |
Material Moves | 86 | 10 |
Machine Setups | 130 | 6 |
Machine Hours | 525 | 32 |
Inspections | 200 | 10 |
Shipments | 60 | 3 |
Table 1: Direct Cost Information and Activities
Activity | Activity Cost | Activity Cost Driver |
Order Processing | $35,000 | Number of Sales Orders |
Purchasing | $36,000 | Number of Purchase Orders |
Material Handing | $28,000 | Material Moves |
Machine Setup | $14,000 | Machine Setups |
Production | $99,000 | Production Runs |
Assembly | $80,000 | Machine Hours |
Inspecting | $11,000 | Number of Inspections |
Shipping | $7,500 | Number of Shipments |
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.
Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:
1.Calculate the allocation rates foreach cost driver using ABC.
2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.
3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.
