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The Columbus Company produces only two products: a major computer part and cell phones. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products. The company expects to produce 4,000 computer parts and 2,000 cell phones in 1999. Each computer part requires two direct labor hours to produce and each cell phone requires one-half hour to produce. The direct material and direct labor costs included in the two products are as follows: Budgeted (Estimated) Total Factory Overhead Data For 1999: Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 1999: Required: 1. Calculate the cost of each product using a plant-wide rate based on direct labor hours. 2. Calculate the activity cost rates for (a) setups, (b) material handling and (c) packaging and shipping. 3. Cost out the two products using an activity-based costing system.
Expert Answer
Total Cost has three parts – a) Direct Material, b) Direct labor, and c) Overheads.
1.
In this portion of the problem, we will divide the total overhead on the basis of the direct labor hours consumed by each of the two products –
| Computer Part |
Cell Phone |
|
| Direct labor hours per unit | 2 | 0.5 |
| Volume | 4000 | 2000 |
| Total labor hrs | 8000 | 1000 |
| Overhead consumed | $240,000 | $30,000 |
| Overhead consumed per unit | $60 | $15 |
Calculations
| Computer Part |
Cell Phone |
|
| Direct labor hours per unit | 2 | 0.5 |
| Volume | 4000 | 2000 |
| Total labor hrs | =4000*2=8000 | =2000*0.5=1000 |
| Overhead consumed | =270000*8/9 | =270000*1/9 |
| Overhead consumed per unit | =240000/4000 | =30000/2000 |
Combining this with the given direct material and direct labor cost per unit, we get –
| Item | Computer Part |
Cell Phone |
| Direct material (per unit) | $30 | $17 |
| Direct labor (per unit) | $16 | $4 |
| Overhead consumed per unit | $60 | $15 |
| Cost per unit | $106 | $36 |
2.
The overhead costs under different heads can be apportioned to the two products using the given cost drivers. THis is shown in the following table –
| Activity | Computer Part |
Cell Phone |
Total |
| Production setups | $20,000 | $60,000 | $80,000 |
| Material handling | $14,000 | $56,000 | $70,000 |
| Packing & shipping | $80,000 | $40,000 | $120,000 |
| Total overhead | $114,000 | $156,000 | $270,000 |
Calculations
| Activity | Computer Part |
Cell Phone |
| Production setups | =80000*5/20 | =80000*15/20 |
| Material handling | =70000*1/5 | =70000*4/5 |
| Packing & shipping | =120000*4/6 | =120000*2/6 |
Dividing this by the respective volumes, we get the overhead cost per unit –
| Activity | Computer Part |
Cell Phone |
| Total overhead | $114,000 | $156,000 |
| Overhead cost/ unit | $28.50 | $78.00 |
3.
The cost per unit as per ABC is shown below –
| Item | Computer Part |
Cell Phone |
| Direct material (per unit) | $30 | $17 |
| Direct labor (per unit) | $16 | $4 |
| Overhead consumed per unit | $28.5 | $78.0 |
| Cost per unit | $74.5 | $99.0 |
