Question

Radley Products has adopted an ACB costing system. The following manufacturing activities, indirect manufacturing costs, and cost drivers have been identified

Machine setup 120,000 2,000 setups

Machining 1,050,000 6,000 machine hrs

Polishing 80,000 10,000 polishing cloths

Quality control 280,000 4,000 test runs

Facility-level costs 120,000 50,000 DL hrs

MOH 1,650,000

The Job Cost Record for Job #624 revealed that direct materials requisitioned for the job totaled $1,050. the Job Cost Record also showed that direct labor for this job totaled 10 hrs at a wage rate of $25 per hour. Other data collected on the resources used by Job #624 included:

1 machine setup required

5 machine hrs

2 polishing cloths

2 quality control tests run

Requirements

1.Calculate the activity cost allocation rate for each of the five pools listed in the table

2. Calculate the total cost of Job #624 (ABC costing system)

3. Why would ABC provide a more accurate allocation of manufacturing overhead than a plantwide rate?

4. Assume that Radley Products used a traditional costing system rather than an ABC system. Its plantwide MOH rate would have been determined using direct labor hrs as the allocation base. How much cost distortion would have occurred on this job?

Answer 1

Answer

• All working forms part of the answer
• Requirement 1: Calculation of Activity rates

Activity	Overhead Cost	Total No. of activity		Activity rate per cost driver
Machine Setup	$120000	2000	setups	$60	Per setups
Machining	$1050000	6000	machine hours	$175	Per machine hours
polishing	$80000	10000	polishing cloths	$8	Per polishing cloths
Quality Control	$280000	4000	test runs	$70	Per test runs
Facility Level Cost	$120000	50000	DL hrs	$2.4	Per DL hrs
Total Manufacturing Overhead	$1,650,000

• Requirement 2: Determination of Total Cost for Job #624

Activity	Activity rate per cost driver (A)	No. of activity cost drivers (B)	Overhead cost allocated (AxB)
Machine Setup	$60	1	$60
Machining	$175	5	$875
polishing	$8	2	$16
Quality Control	$70	2	$140
Facility Level Cost	$2.4	10	$24
Total Manufacturing Overhead			$1115
Add: Direct material			$1050
Add: Direct labor			$250
Total cost for Job #624			$2415

• Requirement 3:

ABC provides more accurate results as it is more scientific and scientifically proven to be effective. Cost are allocated depending upon the activities used by concerned Job/Product. Plantwide rate generalise the cost as equal to each dept/product/job, hence it is not accurate.

• Requirement 4: If plantwide rate was used (traditional Costing)

A	Total manufacturing Overhead	$1650000
B	Total DL Hrs	$50000
C=A/B	Overhead rate per DL Hrs	$33
D	Hrs for Job #624	10
E=C x D	Overhead allocated	$330
F	Overhead allocated under ABC	$1115
G=F-E	Distortion of overhead cost	$785

Hence, if traditional costing have been used the overhead cost allocated would have been lower by $785, thereby the total cost would also have been under casted by $785 when compared to ABC allocated cost.