Question

ABC Air Conditioning Inc. (ABC Airis an air conditioner production company who fabricates the several models of air conditioners. ABC has been attempting to improve their cost efficiency and have heard that activity-based costing may provide some insight into the cost behaviour of their product line. To start the process of calculating the activity-based cost analysis,ABC Air compiled a summary of the following information list of the overhead costs (Table 1), production data (Table 2), proposed cost drivers (Table 3), and an activity matrix that describes the use of each overhead expense by each cost pool. (Table 4) You have been asked to complete this analysis of cost data and will need to complete the following calculations (these analyses should be shown in clear/logical spreadsheet tables): 1 Calculate the plant wide overhead allocation rate using direct labour hours as the driver. 2. Calculate the overhead allocation for each product, total cost for each product, and profit (in %#1) for each product using the plant wide rate. Calculate the overhead allocation for each product using activity-based costing. Calculate total cost ofeach product and profit (in %) for each product based on activity-based costing 3. 4. Table 1 Overhead Costs OH Catego Indirect Labour Computer & Software Product Transportation Ener Facility & Vehicle Rent Business & Training Travel Miscellaneous Maintenance Depreciation Advertisin Office & Utilities TOTAL Cost ($) 3065590 804546 351780 187660 182457 72600 72028 66000 53020 44000 4785 4904466 Table 2 Production Data Cost Parameter Production Volume Unit Selling Price Material cost/unit Total direct labour hours Total direct labour cost Total machine hours Products administered Setup time Production Runs Receipts Distance Customer Contacts 5-ton 3580 1200 665 59660 1020783 10023 6-ton 1193 1365 665 26520 453757 4455 7.5 ton 4402 1575 732 83840 1434502 14085 10-ton 4618 2214 2153 100752 1723867 20822 12.5 ton 1122 3420 2446 22440 383948 4638 15-ton 1264 4801 3263 27576 471825 7043 20-ton 1880 4905 3012 50136 857827 12806 rs 8 153 184 500000 150 8 600 700 900000 547 8 240 200 600000 245 12 120 150 500000 120 12 554 845 10000000 654 12 570 178 700000 347 12 451 602 584015 470 hrs Table 3 Cost Drivers Cost Pool Machines Data record maintenance Material handling Product changeover Scheduling and production preparation Raw material receiving & Handling Number of receipts Product Shipment Customer Service Cost Driver Machine hours Number of products administered Production volumee Setup time (hours) Number of production runs Distance (km) Number of customer contacts Table 4 Activity Matrix ㄩㄧ Cost Pool Machines Data record maintenance Material handlin Product changeover Scheduling and production preparation Raw material receiving & Handlin Product Shipment Customer Service Total 12% 12% 10% 2% 190 15% 20% 100%| 28% 100% | 100% 15% 7% 13% 7% 10% 13% 12% 23% 100% 100% 20% 690 3% 3% 3% 60% 3% 3% 3% 55% 25% 9% 8% 35% 65% 40% 60% 100% 100% | 100% 100% | 100% | 100% 100% | 100% | 100% | 100% | 100% |

Answer 1

1. Overhead allocation Rate (Based on Direct Labour Hours)

Total Overhead=$ 4904466

Direct Labour Hours (given in the question)=370924 Labour Hours

Overhead Rate = $ 4904466/ 370924= 13.22 $ per Labour Hour

2. Income Statement (Based on Overhead allocation rate based on Direct Labor hours)

Particulars	5 Ton	6 Ton	7.5 Ton	10 Ton	12.5 Ton	15 Ton	20 Ton	Total
Selling Price	1200	1365	1575	2214	3420	4801	4905
Production	3580	1193	4402	4618	1122	1264	1880
Sales	4296000	1628445	6933150	10224252	3837240	6068464	9221400
Material	2380700	793345	3222264	9942554	2744412	4124432	5662560
Labour	1020783	453759	1434502	1723867	383948	471825	857827
Overhead	788705	350594	1108365	1331941	296659	364555	662798
Profit	105812	30749	1168019	-2774110	412221	1107652	2038215	920539

3. Overhead allocation based on Activity Based Costing

a)

Particular	Machine	Data Record	Mat Handling	Prd Chan	Schedule	RM	Shipp	Cust Ser	Total
Indirect Labor	-	91968	1686075	766398	-	275903	245246	-	3065590
Com & Soft	160909	48273	24136	24136	24136	474684	24136	24136	804546
Trans	-	-	123123	228657	-	-	-	-	351780
Energy	187660	-	-	-	-	-	-	-	187660
Fac & Vec	-	-	72983	109474	-	-	-	-	182457
Training	72600	-	-	-	-	-	-	-	72600
Mics	10804	5042	9364	5042	7203	9364	8643	16566	72028
Maintain	66000	-	-	-	-	-	-	-	66000
Dep	53020	-	-	-	-	-	-	-	53020
Advet	-	-	-	-	-	-	-	44000	44000
Office	574	574	479	96	48	718	957	1339	4785
Total	478967	145857	1916160	1133803	31387	760669	278982	158641	4904466
No of Activity	73872	14	18059	72	2688	2859	4784015	2533
Rate of Activity	6.48	10418	106.11	15747	11.68	266	0.05	62.63