Question

Activity-Based Costing Slack Corporation has the following predicted indirect costs and cost drivers for 2016 for the given activity cost pools: Maintenance Materials handling Machine setups Inspections Fabrication Department Finishing Department Cost Driver $35,000 $25,000 Machine hours 30,000 15,000 Material moves 70,000 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 10,000 5,000 3,000 1,500 700 1,000 50 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 $14,000 $20,000 Direct labor cost $5,000 $4,000 Machine hours (Fabrication) 500 700 Machine hours (Finishing) 200 100 Materials moves 30 50 Machine setups Inspection hours 30 60 a. Determine the cost of one unit each of ZX300 and SL500, assuming a company-wide overhead rate is used based on total machine hours. Round rate to two decimal places. Overhead rate based on total machine hours per machine hour

Answer 1

Total Indirect costs Fabrication department Finishing department Total Indirect costs 135,000 70,000 205,000 Total Machine hours Fabrication department Finishing department Total Machine hours 10,000 5,000 15,000 Plantwide overhead rate $ 205,000/15,000 $ 13.67 per machine hour Overhead rate based on total machine hours $ 13.67 per machine hour Product cost per unit Direct materials Direct labor Manufacturing overhead Total cost per batch Number of units per batch Cost per unit ZX300 14,000 $ 5,000 9,569 28,569 $ 100 285.69 $ SL500 20,000 4,000 10,936 34,936 100 349.36

Working Notes Calculation of manufacturing overhead SL500 700 100 Fabrication machine hours Finishing machine hours Total Machine hours (a) Predetermined overhead rate (b) Manufacturing overhead (a xb) ZX500 500 200 700 13.67 9,569 $ $ 800 13.67 10,936

b) Department overhead rate Fabrication department Indirect costs Machine hours Overhead rate (135,000 / 10,000) 135,000 10,000 13.50 70,000 Finishing Department Indirect costs Machine hours Overhead rate (70,000 / 5,000) 5,000 14.00 Overhead rate based on Machine hours Fabrication Dept. Overhead rate based on Machine hours Finishing Dept. $ $ 13.50 per machine hour 14.00 per machine hour Product cost per unit ZX300 14,000 $ SL500 20,000 4,000 5,000 Direct materials Direct labor Manufacturing overhead Fabrication Department (500 x 13.50, 700 x 13.50) Finishing Department (200 x 14.00, 100 x 14.000 Total cost per batch Number of units per batch Cost per unit $ 6,750 2,800 28,550 100 285.50 $ 9,450 1,400 34,850 100 348.50 $ $

c. Activity based costing Total Cost Cost Driver [a] Maintenance Materials handling Machine setups Inspections 60,000 Machine hours 45,000 Materials moves 75,000 Machine setups 25,000 Inspection hours Total Activity Activity rate [b] [a/b] 15,000 $ 4.00 4,500 $ 10.00 750 $ 100.00 1,000 $ 25.00 Product cost per unit ZX300 14,000 $ SL500 20,000 4,000 5,000 Direct materials Direct labor Manufacturing overhead: Maintenance activity (700 x $4, 800 x $ 4) Materials handling activity (30 x $ 10,50 x $ 10) Machine setup activity (5 x $ 100,9 x $ 100) Inspections activity (30 x $ 25, 60 x $ 25) Total cost per batch Number of units per batch Cost per unit 2,800 300 500 750 23,350 100 233.50 3,200 500 900 1,500 30,100 100 301.00 $ $