Question

Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs.

Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below area sample of possible cost pools for Waterways.

Assembling		Payroll
Billing		Plant supervision
Digging trenches		Product design
Janitorial		Purchasing materials
Machine maintenance		Selling
Machine setups		Testing
Molding		Welding
Packaging

Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways. (Round answers to 2 decimal places, e.g. 12.25.)

WATERWAYS CORPORATION
Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers per Activity		Actual Use of Drivers
Irrigation installation		Labor cost		$2,031,480		12,540		12,519
Machining (all machine use)		Machine hours		1,816,800		36,336,000		36,337,000
Customer orders		Number of orders		32,500		2,500		2,464
Shipping		none (direct)		N/A		N/A		traced directly
Design		Cost per design		768		8		7
Selling		Number of sales calls		312,000		20,800		20,980

WATERWAYS CORPORATION
Activity Cost Pools		Activity- Based Overhead Rates		Actual Cost Assigned
Irrigation installation		$		$
Machining (all machine use)
Customer orders
Design
Selling

Answer 1

Solution :

Calculation of Activity Based Overhead Rate and Allocation of Overhead based on actual activities :

Activity Cost Pool	Cost Driver	Estimated Overhead	Expected Cost Driver	Activity Based Over head Rate	Actual Cost Driver	Actual Cost Assigned
(A)	(B)	(C) = (A) / (B)	(D)	(E) = (C) * (D)
Irrigation Installation	Labour Cost	$ 2,031,480	12,540	$ 162	12,519	$ 2,028,078
Machining	Machine Hours	$ 1,816,800	36,336,000	$ 0.05	36,337,000	$ 1,816,850
Customer Order	No. of Order	$ 32,500	2,500	$ 13	2,464	$ 32,032
Shipping	None (Direct)	N/A	N/A	NA	Traced Directly	NA
Design	Cost Per Design	$ 768	8	$ 96	7	$ 672
Selling	No. of Sales Call	$ 312,000	20,800	$ 15	20,980	$ 314,700