Question

X 40% Problem 7: PNG produces a variety of differently flavored confectionary products (candy bars, chews, and other sweets) in batches using various combinations of highly automated processes. These processes include mixing, cooking and packaging. Some, but not all of the processes are common to all products. Each type of product has its own manager. The Managing Director has received complaints from some Product Managers about the amount of costs being charged to their products. The Managing Director thinks that the problem would be solved by using activity-based costing (ABC) instead of the traditional absorption costing system currently used. The company's ABC system contains the following six activity cost pools and activity rates: Activity Cost Pool Activity Rates Supporting direct labor $7.00 per direct labor-hour Machine processing $3.00 per machine-hour Machine setups $40.00 per setup Production orders $160.00 per order Shipments $120.00 per shipment Product sustaining $800.00 per product Activity data have been supplied for the following products: Total Expected Activity Product J35 W52 Direct labor-hours 1,000 Machine-hours 3,200 30 Machine setups 5 Production orders 5 Shipments 10 Product sustaining 1 Required: 1. Write a report to the Managing Director discussing the applicability of ABC at the PNG company. 2. Determine the total overhead cost that would be assigned to each of the products listed above in the activity-based costing system. 3. Explain why top management support and cross-functional involvement are crucial when attempting to implement an activity-based costing system. 40 1

Answer 1

Cost allocated to products
			J35
Activity cost pool	Activity rate (A)	Activity (B)	Overheads allocated (A*B)
Supporting Direct labor	Cost per Direct labor hour	7	Direct labor-hours	1000	7000
Machine Processing	Cost per Machine hour	3	Machine-hours	3200	9600
Machine setups	Cost per setup	40	Machine setups	5	200
Production orders	Cost per order	160	Production orders	5	800
Shipments	Cost of shipment	120	Shipments	10	1200
Product sustaining	Cost Per product	800	Product sustaining	1	800
Total Overhead Cost					19600
			W52
Activity cost pool	Activity rate (A)	Activity (B)	Overheads allocated (A*B)
Supporting Direct labor	Cost per Direct labor hour	7	Direct labor-hours	40	280
Machine Processing	Cost per Machine hour	3	Machine-hours	30	90
Machine setups	Cost per setup	40	Machine setups	1	40
Production orders	Cost per order	160	Production orders	1	160
Shipments	Cost of shipment	120	Shipments	1	120
Product sustaining	Cost Per product	800	Product sustaining	1	800
Total Overhead Cost					1490