Question

College Supply Company 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 recommend 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	Rec. Cost Driver	Est. Cost	Est. cost driver units
Setting up production	# of production runs	38,400	120 runs
Processing orders	# of orders	52,000	200 orders
Handling materials	Pounds of materials	14,000	7,000 pounds
Using machines	Machine-hours	54,000	9,000 hours
Providing quality mgmt	# of inspections	48,000	40 inspections
Packing and shipment	Units shipped	42,000	21,000 units
		248,400

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

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

	Short	Medium	Tall
# of units produced	1,000	600	400
Direct materials costs	$5,000	$2,500	$2,000
Direct-labor hours	110	100	90
# of orders	9	9	4
# of production runs	2	3	8
Pounds of material	300	800	300
Machine-hours	500	300	200
# of inspections	2	1	2
Units shipped	1,000	600	300

Direct labor costs were $20 per hour.

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. (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

a1	Predetermined overhead rate for year 5 for each cost driver
	Activity	Rec. Cost Driver	Est. Cost	Est. cost driver units	Predetermined overhead rate per driver unit
	Setting up production	# of production runs	38,400	120 runs	$     320.00	per run
	Processing orders	# of orders	52,000	200 orders	$     260.00	per order
	Handling materials	Pounds of materials	14,000	7,000 pounds	$          2.00	per pound
	Using machines	Machine-hours	54,000	9,000 hours	$          6.00	per hr
	Providing quality mgmt	# of inspections	48,000	40 inspections	$ 1,200.00	per inspection
	Packing and shipment	Units shipped	42,000	21,000 units	$          2.00	per unit
	Total		248,400
a2	predetermined rate using direct labor-hours as the allocation base
			= Total overhead/labour hrs
			= $248400/2000 hrs
			$        124.20	per hr
b		Short	Medium	Tall
	# of units produced	1,000	600	400
	Direct materials costs	$             5,000.00	$ 2,500.00	$             2,000.00
	Direct-labor [$20*no of hrs ]	$                   2,200.00	$    2,000.00	$                  1,800.00
	Overhead[$124.20*no of hrs]	$                13,662.00	$ 12,420.00	$               11,178.00
	TOTAL COST	$                20,862.00	$ 16,920.00	$               14,978.00
c		DriverUnit			Overhead cost per driver
		Short	Medium	Tall		Short [ Driver Unit*Cost per driver]	Medium [ Driver Unit*Cost per driver]	Tall[ Driver Unit*Cost per driver]
	# of units produced	1,000	600	400
	Direct materials costs					$5,000	$2,500	$2,000
	Direct-labor hours	110	100	90	$     20.00	$        2,200.00	$ 2,000.00	1800
	# of orders	9	9	4	$     260.00	$        2,340.00	$ 2,340.00	$ 1,040.00
	# of production runs	2	3	8	$     320.00	$           640.00	$     960.00	$ 2,560.00
	Pounds of material	300	800	300	$          2.00	$           600.00	$ 1,600.00	$     600.00
	Machine-hours	500	300	200	$          6.00	$        3,000.00	$ 1,800.00	$ 1,200.00
	# of inspections	2	1	2	$ 1,200.00	$        2,400.00	$ 1,200.00	$ 2,400.00
	Units shipped	1,000	600	300	$          2.00	$        2,000.00	$ 1,200.00	$     600.00
	TOTAL COST					$18,180	$13,600	$12,200