Question

Houston Company produces two products. Standard and Jumbo, and currently uses a costing system that accumulates all overhead costs in a single cost pool and assigns it to products based on direct labor dollars. After completing a study that showed overhead costs were driven by factors other than volume, Houston's management has decided to implement an activity based costing (ABC) system. The study showed that manufacturing overhead costs could be associated with three activities: (1) purchasing. (2) receiving, and (3) maintenance. The costs of each of these activities, their drivers, and the driver units for each product are as follows: Activity Activity Driver Costs Purchasing Number of purchase orders $ 42,000 Receiving Number of deliveries 44,000 Maintenance Maintenance hours 48,000 $134.000 Other data for the year are as follows: Activity Driver Units Standard Jumbo Total 200 100 300 50 150 200 800 1,200 2,000 Standard 24,000 Jumbo 8,000 Total 32,000 Units produced Direct materials cost: Per unit Total direct materials cost Direct labor cost $12 $288,000 $64,000 $15 $120,000 $408,000 $16,000 $80,000 Ronrad.

Answer 1

a)

Traditional Overhead Rate

= Budgeted Overhead/Budgeted Labor Cost

= $134,000/$80,000

= 1.68

b)

Overhead assigned to Standard product using traditional costing is:-

Direct Labor Cost*Traditional Rate

= $64,000*1.68

= $107,520

c)

Overhead Assigned to Standard product using ABC costing

Predetermined Rate = Cost pool/Cost Activity

Purchasing Dept. = $42,000/300

= $140/Purchase Order

Receiving Dept. = $44,000/200

= $220/Delivery

​​​​ Maintenance Dept.= $48,000/2,000

= $24/Hr

Total Overhead Assigned = ($140*200)+($220*50) + ($24*800)

= $58,200

d)

Total cost per unit of Standard product Under ABC Costing

Direct Materials = $288,000

Direct Labor = $ 64,000

Overhead = $ 58,200

Total Cost = $410,200

Units Produced = 24,000

Cost per Units = $410,200/24000

= $17.09