Question

Woodland Industries manufactures and sells custom-made windows. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $11 per hour and that there were no beginning inventories. The following information was available for 2019, based on an expected production level of 52,500 units for the year, which will require 227,000 direct labor hours: Budgeted Costs Cost Driver Used as Cost Allocation Activity Cost Driver for 2019 Allocation Base Rate Materials handling $ 34,050 Number of parts used $ 0.15 per part Cutting and lathe work 3,325,550 Number of parts used 14.65 per part Assembly and inspection 3,495,880 Direct labor hours 15.40 per hour The following production, costs, and activities occurred during the month of July Units Produced 3,320 Direct Materials Costs $189,700 Number of Parts Used 1,075 Direct Labor Hours 13,600 Required: a. Calculate the total manufacturing costs and the cost per unit of the windows produced during the month of July (using the activity- based costing approach). (Round "Cost per unit produced" to 2 decimal places.) Total manufacturing cost Cost per unit produced

Answer 1

1. Activity Based Costing (ABC) is a technique which involves identification of costs with each cost driver activity and making it as a basis of apportionment or assignment of cost over different cost objects.

Here Cost drivers and ABC rate for each costs are given as under:

a. Materials handling - Number of parts used @ $0.15 per part

b. Cutting and lathe work - Number of parts used @ $14.65 per part

c. Assembly and inspection - Direct labour hours@ $15.40 per hour

Statement showing manufacturing cost
Direct Materials cost	$109,700
Materials handling ( 1075 * 0.15)	$161.25
Cutting and lathe work (1075 * 14.65)	$15,748.75
Assembly and inspection( 13,600 * 15.40)	$209,440
Total manufacturing cost	$335,050
Cost per unit produced( 335,050/3320)	$100.92

2. In this case, manufacturing overhead is allocated on the basis of overhead rate based on budgeted costs and labour hours .

Budgeted cost for 2019 = 34,050+ 3,325,550 + 3,495,800

= $6,855,400

Labour hours for budgeted cost = 227,000

Overhead rate per hour = 6,855,400/ 227,000

= $30.2 per hour

Overhead cost = Direct labour hours used * OH rate/ hour

= 13,600* 30.2

= $410,720

Statement showing manufacturing cost
Direct Materials cost	$109,700
Total overhead cost	$410,720
Total manufacturing cost	$520,420
Cost per unit produced( 520,420/3320)	$156.75

3. Approach that provides better information to manufacturing managers is Activity Based Costing approach since production cost is arrived based on cost driver activities .