Question

College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center.

Activity	Recommended Cost Driver	Estimated Cost			Estimated Cost Driver Units
Setting up production	Number of production runs	$	33,600		120	runs
Processing orders	Number of orders		48,000		200	orders
Handling materials	Pounds of materials		18,000		9,000	pounds
Using machines	Machine-hours		40,000		8,000	hours
Providing quality management	Number of inspections		48,000		40	inspections
Packing and shipping	Units shipped		40,000		20,000	units
		$	227,600

In addition, management estimated 2,000 direct labor-hours for year 5.

Assume that the following cost driver volumes occurred in February, year 5.

	Short			Medium			Tall
Number of units produced		1,100			500			300
Direct materials costs	$	4,000		$	2,000		$	1,500
Direct labor-hours		110			130			120
Number of orders		8			9			5
Number of production runs		3			4			8
Pounds of material		500			800			100
Machine-hours		400			200			300
Number of inspections		2			2			1
Units shipped		1,100			500			200

Direct labor costs were $20 per hour.

Required:

a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base.
b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement a.
c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.)

Answer 1

a)Predetermined overhead rate for each cost driver recommended by employees as below:

Number of production runs = $33600/120=$280 per run
Number of orders = $48000/200= $240 per order
Pound of materials = $18000/9000 = $2 per pound
Machine hours = $40000/8000= $5 per hour
Number of Inspections = $48000/40=$1200 per inspection
Units shipped = $40000/2000 = $2 per unit

predetermined rate using direct labor-hours as the allocation base = $227,600/2000 = $113.8 per hour

b) Solution as below:

Component of cost	Short	Medium	Tall
Material costs (0)	4000	2000	1500
Direct labor hours (i)	110	130	120
Direct labor costs per hour (ii) (given in question)	20	20	20
Overhead labor cost per hour (iii) (computed in part a)	113.8	113.8	113.8
Total cost per hour (iv=ii+iii)	133.8	133.8	133.8
Total cost (v=0+ i*iv)	18718	19394	17556
Number of units (vi)	1100	500	200
Production cost per unit (=v/vi)	17.02	38.79	87.78

c) Solution as below:

		Consumption of cost driver units			Total Cost
Cost Driver	Rate per driver unit ($)	Short	Medium	Tall	Short	Medium	Tall
Number of production runs (i)	280	3	4	8	840	1120	2240
Number of orders (ii)	240	8	9	5	1920	2160	1200
Pounds of materials (iii)	2	500	800	100	1000	1600	200
Machine-hours (iv)	5	400	200	300	2000	1000	1500
Number of inspections (v)	1200	2	2	1	2400	2400	1200
Units shipped (vi)	2	1100	500	200	2200	1000	400
Material cost (vii)					4000	2000	1500
Labor hours (viii)					110	130	120
Direct labor costs (@ $20 per hour) (ix)					2200	2600	2400
Total costs (x = i+ii+iii+iv+v+vi+vii+ix)					16560	13880	10640
Total cost per unit (=x/vi)					15.05	27.76	53.20