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Activity Based Costing
IE Department Manufacturing Makes two Products (A and B). The management decides to use the following Activities and Cost Drivers. Activities Cost/year Cost Driver Consumption of Cost Driver per year Purchasing, Storage and material handling S 250,000 Raw material cost $ 1,000,000 Engineering and Product Design $ 300,000 Hours in design 5,000 hours Set up Costs $ 100,000 Number of setups 1,000 setups $ 300,000 M/c. Depreciation and maintenance Machine hours 100.000 hours $ 250,000 Factory depreciation taxes insurance and utilities Machine hours 100,000 hours Other manufacturingS 200,000 overhead costs Machine hours 100,000 hours Total S 1,400,000 The requirements of two of the products (A and B) are as follows: Product A (per 15,000 units) Product B (per 10,000 units) 50 hours Direct Labor Hours Raw-Material cost Hours in Design Set ups Machine hours 24 hours $ 36,000 25 S 50,000 30 24
Expert Answer
Solution:
(A) Calculation of overhead cost per unit of products A and B using Activity based costing
| Activities | Cost per unit of Cost Driver (Refer Note 1) | Cost per 15,000 Units of Product A | Cost per 10,000 Units of Product B |
| Purchasing, Storage and material handling | $0.25 | $12,500
(50,000*0.25) |
$9,000
(36,000*0.25) |
| Engineering and Product Design | $60.00 | $600
(10*60) |
$1,500
(25*60) |
| Set up Costs | $100.00 | $300
(100*3) |
$500
(100*5) |
| M/c Depreciation and maintenance | $3.00 | $90
(3*30) |
$72
(3*24) |
| Factory depreciation taxes insurance and utilities | $2.50 | $75
(2.5*30) |
$60
(2.5*24) |
| Other manufacturing overhead cost | $2.00 | $60
(2*30) |
$48
(2*24) |
| $13,625 | $11,180 | ||
| Total: | $1,400,000 Per Year | $13,625 | $11,180 |
| for 15,000 Units | for 10,000 Units | ||
| Overhead cost per unit (Use 3 decimal place) | $0.908
(13,625 / 15,000) |
$1.118
(11,180 / 10,000) |
Note 1 — Cost per unit of cost driver
| Activities | Cost/year | Cost Driver | Consumption of Cost Driver per year | Cost per unit of Cost Driver (Cost per year / Consumption of Cost Driver Per Year) |
| Purchasing, Storage and material handling | $250,000 | Raw material cost | $1,000,000 | $0.25 |
| Engineering and Product Design | $300,000 | Hours in design | 5000 Hours | $60.00 |
| Set up Costs | $100,000 | Number of setups | 1,000 Setups | $100.00 |
| M/c Depreciation and maintenance | $300,000 | machine hours | 100,000 hours | $3.00 |
| Factory depreciation taxes insurance and utilities | $250,000 | machine hours | 100,000 hours | $2.50 |
| Other manufacturing overhead cost | $200,000 | machine hours | 100,000 hours | $2.00 |
| Total | $1,400,000 |
(B) Overhead Cost per unit of Products A and B, based on direct labor hours.
Total Direct Labor Hours per year = $3,500 DLHs
Total Estimated Overheads per year = $1,400,000
Overhead Cost per Direct Labor Hour = Total Estimated Overheads per year $1,400,000 / Total Direct Labor Hours per year $3,500 DLHs
= $400 per DLH
Overhead Cost per direct labor hour = $400.00 per hour
Product A
Overhead Cost per Unit for Product A = (Direct Labor Hours for Product A 50 Hours x Overhead Rate $400 per DLH) / 15,000 Units
= $20,000 / 15,000 Units
= $1.33 per unit of product A
Product B
Overhead Cost per Unit for Product B = (Direct Labor Hours for Product B 24 Hours x Overhead Rate $400 per DLH) / 10,000 Units
= $9,600 / 10,000 Units
= $0.96 per unit of product B
