Question

Question 3 International Steel Company has budgeted manufacturing overhead costs of $1,995,000. It has allocated overhead on a plant-wide basis to its two products (soft steel and hard steel) using machine hours, which are estimated to be 100,000 for the current year. The company has decided to experiment with activity-based costing and has created five activity cost pools and related activity cost drivers as follows: Activity Centre Cost Driver Estimated Activity Material handling Purchase orders Product testing Machine set-up Machining Number of moves Number of orders Number of tests Number of set-ups Machine hours Estimated Overhead $301,000 $105,000 $444,000 $335,000 $810,000 43,000 moves 1,400 orders 3,700 tests 5,000 set-ups 100,000 machine hours Each unit of the products requires the following: Soft Steel Hard Steel $300 $200 $120 $60 Direct materials costs Direct labour costs Purchase orders Machine set-up Product testing Machining Material handling 10 5 3 4

Answer 1

Solution

	Soft steel	Hard Steel
Total Manufacturing Cost per Unit	$              1,218.00	$               1,058.00

Working

	Soft steel	Hard Steel
Direct material	$                  300.00	$                   200.00
Direct labor	$                  120.00	$                     60.00
Overheads	$                  798.00	$                   798.00
Total Cost	$              1,218.00	$               1,058.00

.

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Total Overheads	Number of Machine hour	$ 1,995,000	100000	$             19.95	Per Machine hour

.

Cost assigned to Soft steel
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Total Overheads	$           19.95	40.00	$ 798

.

Cost assigned to Hard Steel
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Total Overheads	$           19.95	40	$ 798