Question

Zippo manufactures one type of product and currently uses a plant-wide rate based on direct labor hours to apply overhead for costing purposes. Each product is designed based on customer specifications. The controller noticed significant variation in product profitability and thought the problem may be the costing system currently being used. She is therefore considering an ABC costing method.

The following cost information was been obtained for the coming year.

Activity	Overhead Budgeted $	Driver (Budgeted volume)
Design	260,000	6,000 design hours
Set-up	120,000	5,000 set-up hours
Material Handling	300,000	20,000 material moves
Assembly	1,200,000	40,000 direct labor hours
Shipping	120,000	20,000 units sold
Total	2,000,000

1. Determine the ABCs rates for each activity.
2. Zippo is evaluating an order to manufacture and deliver 20 units for $40,000. Estimated direct material costs are $15,000 and direct labor costs are $5,000 (100 hours). Determine the estimated costs under the ABC rates. Assume that the order is expected to utilize 10 design hours, 5 set-up hours, and 20 material moves.
3. Should Zippo change to ABC cost?

Please step -by- step

Answer 1

Requirement | Determination of ABC Rates Particulars Overheads Driver Qty. Design $ 260,000 6,000 Design Hours $ Set-up $ 120,000 5,000 Set-up Hours $ Material Handling $ 300,000 20,000 Material Moves $ Assembly $ 1,200,000 40,000 Direct Labor Hours $ Shipping $ 120,000 20,000 Units Sold $ Total Costs $ 2,000,000 Activity Rate 43.33 Per Design Hour 24.00 Per Set-up Hour 15.00 Per Material Move 30.00 Per Direct Labor Hour 6.00 Per Unit Sold AA Requirement | Determination of ABC Cost Particulars $ Direct Materials $ 15,000 Direct Labor $ 5,000 Overheads : - Design $ 433 - Set-up $ 120 - Material Handling 300 - Assembly $ 3,000 - Shipping $ 120 Total Costs $ 23,973