Question

After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 119,000 units of the Sport model and 49,500 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 16 percent.

Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility

		Cost Driver Volume
Activity	Cost Driver	Sport	Pro	Total
Assembly building
Assembling	Machine-hours	7,900	31,900	39,800
Setting up machines	Setup hours	59	590	649
Handling material	Production runs	27	59	86
Packaging building
Inspecting and packing	Direct labor-hours	67,600	26,600	94,200
Shipping	Number of shipments	119	238	357

Third Quarter Unit Cost Report, Activity-Based Costing—CenterPoint Manufacturing Facility

	Sport				Pro
Direct material	$	1,519,000			$	2,438,000
Direct labor
Assembly	$	769,000			$	638,000
Packaging		1,009,000				398,000
Total direct labor	$	1,778,000			$	1,036,000
Direct costs	$	3,297,000			$	3,474,000
Overhead
Assembly building
Assembling (@ $30 per MH)	$	237,000			$	957,000
Setting up machine (@ $900 per setup hour)		53,100				531,000
Handling material (@ $3,000 per run)		81,000				177,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour)		338,000				133,000
Shipping (@ $1,320 per shipment)		157,080				314,160
Total ABC overhead	$	866,180			$	2,112,160
Total ABC cost	$	4,163,180			$	5,586,160
Number of units		119,000				49,500
Unit cost	$	34.98			$	112.85

Required:

a. Compute the amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900.

	Model Total ABC Overhead Sport Pro

Answer 1

Total Overhead
Particulars	Sport	Pro
Assembling Building
Assembling (@ $30 per MH) (A)	$237000	$957000
Setting Machine (@ $900 per setup hour) (note) (B)	$44604	$446040
Handling Material (@ $3000 per run) ©	$81000	$177000
Packaging Building
Inspecting and Packing (@ $5 per labor hour)   (D)	$338000	$133000
Shipping (@1320 per shipment) €	$157080	$314160
Total ABC overhead (A+B+C+D+E)	$857684	$2027200
Note:
Particulars	Sport	Pro
present setting up cost (@ 900 per setup hour)   (A)	$53100	$531000
Set up rate per hour (B)	$900	$900
Number of set up cost (A/B)= C	59	590
Less: reduce in set up hours by 16% (C*16%)= D	9.44	94.4
Setup hours for first quarter (C-D)=E	49.56	495.6
Setting up cost (B*E)	$44604	$446040
Model	Total ABC overhead
Sport	$857684
Pro	$2027200