Question

Activity-Based Costing Slack Corporation has the following predicted indirect costs and cost drivers for 2016 for the given activity cost pools Fabrication Department Finishing Department Cost Driver Maintenance Materials handling Machine setups Inspections $35,000 30,000 70,000 $25,000 Machine hours 15,000 Material moves 5,000 Machine setups 25,000 Inspection hours $135,000 $70,000 The following activity predictions were also made for the year: Machine hours Material moves Machine setups Inspection hours Fabrication Department Finishing Department 5,000 1,500 50 1,000 10,000 3,000 700 It is assumed that the cost per unit of activity for a given activity does not vary between departments Slack's president, Charles Slack, is trying to evaluate the company's product mix strategy regarding two of its five product models, Zx300 and SL500. The company has been using a company-wide overhead rate based on machine hours but is considering switching to either department rates or activity-based rates The production manager has provided the following data for the production of a batch of 100 units for each of these models: ZX300 SL500 Direct materials cost Direct labor cost Machine hours (Fabrication) Machine hours (Finishing) Materials moves Machine setups Inspection hours $14,000 $20,000 $5,000 $4,000 700 100 50 500 200 30 30 60

Answer 1

a)Overhead rate=Total manufacturing overhead/total machine hours
=(135000+70000)/(10000+5000)
=13.67

b) overhead rate based on machinf hrs for fabrication dept=department overhead/department machine hours
=135000/10000=13.5
finishing department=70000/5000=14

c)Activity based rates:
Maintenace=total costs/total machine hours
=(35000+25000)/(10000+5000)=4
Materials handling=(30000+15000)/(3000+1500)=10
Machine setup=(70000+5000)/(700+50)=100
Inspection activites=25000/1000=25

Overhead rate 13.6666667 Zx300 (135000+70000)/(10000+ Zx300 14000 5000 (500+200) B1 SUM(B3:B5) 1 Overhead rate SL500 SL500 Direct material Direct labour 14,000.00 20,000.00 5,000.00 4,000.00 9,566.67 10,933.33 28,566.67 34,933.33 100.00 349.33 3 Direct material 4 Direct labour 5 Mfg overhead 6 Total cost per batch 7 No of units per batch 8 Cost per unit 9 20000 g overhead Total cost per batch No of units per batch Cost per unit 700+100) B1 SUM(C3:C5) 100.00 285.67 Zx300 SL500 Direct material Direct labour Mfg overhead Total cost per batch No of units per batch Cost per unit 14,000.00 20,000.00 5,000.00 4,000.00 9,450.00 11,200.00 28,450.00 35,200.00 100.00 352.00 11 Direct material 12 Direct labour 13 Mfg overhead 14 Total cost per batch 15 No of units per batch 16 Cost per unit Zx300 14000 5000 (500+200) 13.5 SUM(B11:B13) SL500 20000 4000 (700+100)*14 -SUM(C11:C13) 100.00 284.50 -B14/B15 -C14/C15 Zx300 SL500 SL500 20000 4000 Zx300 Direct material Direct labour Mfg overhead 14,000.00 20,000.00 5,000.00 4,000.00 19 Direct material 20 Direct labour 21 Mfg overhead 22 maintenance activity 23 Material hand act 24 Machine setup act 25 Inspection act 26 Total cost per batch 27 No of units per batch 28 Cost per unit 5000 maintenance activity 2,800.003,200.00 500.00 5,000.00 4,500.00 750.00 1,500.00 27,850.00 33,700.00 100.00 337.00 Material hand act Machine setup act 300.00 Inspection act Total cost per batch No of units per batch SUM(B19:B25) SUM(C19:C25) 100.00 278.50 Cost per unit B26/B27 C26/C27