Big Red produces precisely engineered components for engines. There are 2 products: Quality and Superior. The existing cost accounting system applies all costs except direct materials to products based on direct labor hours. During 2001, you conducted a study of operations and cost drivers that eventually led to the company’s dividing its sole manufacturing department into 5 activities. The 2002 budgeted support costs for these activities are as follows:
|
Activity |
Support Costs |
Cost Driver |
| Materials Handling | $158,400 | Number of parts |
| Machine Set-ups | 120,000 | Number of set-ups |
| Machinery Maintenance | 2,460,000 | Machine hours |
| Finishing | 2,192,000 | Direct labor hours |
| Packing and shipping | 90,000 | Number of orders shipped |
| $5,020,400 |
The following budget is for 2002:
| Quality | Superior | Totals | |
| Number of units | 10,000 | 800 | N/A |
| Direct materials cost per unit | $80 | $110 | N/A |
| Number of parts | 300,000 | 96,000 | 396,000 |
| Machine hours | 70,000 | 12,000 | 82,000 |
| Direct labor hours | 100,000 | 9,600 | 109,600 |
| Machine set ups | 100 | 50 | 150 |
| Orders shipped | 1,000 | 800 | 1,800 |
- Calculate the activity cost driver rate for each activity using the chart below:
- Calculate support costs per unit for each product using activity-based costing.
- Calculate the budgeted overhead cost per unit for each product using the existing direct labor hour-based system.
- Calculate the activity cost driver rate for each activity using the chart below:
|
Activity |
Budgeted Support Costs | Budgeted Cost Driver Usage | Activity Cost Driver Rate |
| Materials handling
|
$158,400 | 396,000
|
$.40/part |
| Machine setups
|
$120,000 | 150 | $800/set-up |
| Machinery maintenance | $2,460,000 | 82,000 | $30/mhr |
| Finishing
|
$2,192,000 | 109,600 | $20/dlh |
| Packing and shipping
|
$90,000 | 1,800
|
$50/shipment |
- Calculate support costs per unit for each product using activity-based costing.
| Quality | Superior | |
| Materials Handling | $.4/part * 300,000 = $120,000 | $.4/part * 96,000 = $38,400 |
| Machine Set-up | $800/set-up * 100 = $80,000 | $800/set-up * 50 = $40,000 |
| Machinery Maintenance | $30/mhr * 70,000 = $2,100,000 | $30/mhr * 12,000 = $360,000 |
| Finishing | $20/dlh * 100,000 = $2,000,000 | $20/dlh * 9,600 = $192,000
|
| Packing and Shipping | $50/shpmt * 1,000 = $50,000 | $50/shpmt * 800 = $40,000 |
Totals $4,350,000 $670,400
Divide by # of units 10,000 800
Support Cost per Unit $435/unit $838/unit
- Calculate the budgeted overhead cost per unit for each product using the existing direct labor hour-based system.
= $45.81/ DLH
Quality:
(100,000 DLH / 10,000 units = 10 DLH per unit
$45.81 x 10 DLH = $458.10/unit
Superior:
9,600 DLH / 800 units = 12 DLH per unit
$45.81 x 12 DL hrs/unit = $ 549.72 per unit
