Question

Activity-Based Costing Slack Corporation has the following predicted indirect costs and cost drivers for 2019 for the given activity cost pools: Fabrication Department Finishing Department Cost Driver Maintenance $20,000 $10,000 Machine hours Materials handling 30,000 15,000 Material moves Machine setups 70,000 5,000 Machine setups Inspections 25,000 inspection hours $120,000 $55,000 The following activity predictions were also made for the year: Fabrication Department Finishing Department Machine hours 10,000 5,000 Material moves 3,000 1,500 Machine setups 700 50 Inspection hours 1,000 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: Direct materials cost Direct labor cost Machine hours (Fabrcation) Machine hours (Finishing) Materials moves Machine setups Inspection hours ZX300 SL500 $12,000 $18,000 $5,000 $4,000 500 700 200 100 30 50 5 9 30 60

Answer 1

Total overhead cost
Fabrication department	120000
Finishing department	55000
Total costs	175000
Total machine hours
Fabrication	10000
Finishing	5000
Total hours	15000

a.

Pre-determined overhead rates using machine hours	=total overhead cost/total machine hours
	=175000/15000
overhead rate per machine hour	11.67
Company wide rate
Product costs per unit
	ZX300	SL500
Direct material	12000	8000
Direct labor	5000	4000
Manufacturing overheads	8169	9336
	=700*11.67	=800*11.67
Total cost per batch	25169	21336
Number of units in a batch	100	100
Cost per unit	251.69	213.36

b.

overhead rate fabrication department	=cost of fabrication department/machine hours fabrication department
	=120000/10000
	12
overhead rate finishing department	=cost of finishing department/machine hours finishing department
	=55000/5000
	11
Department overhead rates
Product costs per unit
	ZX300	SL500
Direct material	12000	8000
Direct labor	5000	4000
Fabrication overhead	6000	8400
	=500*12	=700*12
Finishing overhead	2200	1100
	=200*11	=100*11
Total cost per batch	25200	21500
Number of units in a batch	100	100
Cost per unit	252	215

c.

Activity based overhead rates
	Maintenance costs	Materials handling	Machine set-up	Inspections
Fabrication	20000	30000	70000
Finishing	10000	15000	5000	25000
Total (a)	30000	45000	75000	25000
	Machine hours	Material moves	Machine set-uos	inspection hours
Fabrication	10000	3000	700
Finishing	5000	1500	50	50
Total(b)	15000	4500	750	50
Cost per driver (a/b)	2	10	100	500
Activity based overhead rates
Maintenance	2
Material handling	10
Machine set-up	100
inspection activities	500
Activity based overhead rates
Product costs per unit
	ZX300	SL500
Direct material	12000	8000
Direct labor	5000	4000
Maintenance	1400	1600
	=700*2	=800*2
Material handling	300	500
	=30*10	=50*10
Machine set-up	500	900
	=5*100	=9*100
Inspection	15000	30000
	=30*500	=60*500
Total cost per batch	34200	45000
Number of units in a batch	100	100
Cost per unit	342	450