Question

Please provide an example of computing and use manufacturing overhead allocations using hierarchical and activity-based costing methods.

Answer 1

Let the data be: Traditionally, management allocates overheads using machine-hours as base Management Top Middle Bottomm Total Sales revenue $8,900,000 $14,000,000 $14,500,000 $37,400,000 Direct costs Direct labor cost Variable overhead: $2,700,000 $4,500,000 $3,100,000 $10,300,000 $590,000 $890,000 $1,720,000 $3,200,000 Setting up machines Processing sales orders Warehousing Operating machines Shipping $2,400,000 $1,680,000 $2,340,000 $1,250,000 $851,000 $15,379,000 $6,100,000 $9,279,000 Contribution margin Organization's administrative expenses Gross profit

Management plans to implement activity-based costing method as below: Activit Setting up machines Processing sales orders Warehousing Operating machines Shipping Cost Driver Production runs Sales orders received Units held in inventory Machine-hours Units shipped Middle 20 430 180 8,800 19,000 Top 170 110 6,500 9,000 Bottom 21 200 100 9,700 9,000

Assuming that the overead costs are assigned using machine-hours as the base (Hierarchical method Setting up machines Processing sales orders Warehousing Operating machines Shipping Total Variable overhead cost Total Machine hours Overhead rate per machine hour $2,400,000 $1,680,000 $2,340,000 $1,250,000 $851,000 $8,521,000 25,000 [6,500 + 8,800+9,700] $340.84 [$8,521,000/ 25,000 MHs] XYZ Company Segmented Income Statement Top Middle Bottomm Total Sales revenue $8,900,000 $14,000,000 $14,500,000 $37,400,000 Variable Expenses: $2,700,000 $4,500,000 $3,100,000 $10,300,000 Direct costs Direct labor cost Variable overhead: Total variable expenses 5,505,460 $8,389,392 $8,126,148 $22,021,000 $590,000 $890,000 $1,720,000 $3,200,000 $2,215,460 $2,999,392 $3,306,148 $8,521,000 [Ref: NOTE] $3,394,540 $5,610,608 $6,373,852 $15,379,000 [Sales - Variable Exps.] Contribution margin Organization's administrative expenses Gross profit $6,100,000 [Not allocated] $9,279,000

NOTE Variable overhead allocated to Top 6,500 MHs x $340.84 - $2,215,460; Variable overhead allocated to Middle 8,800 MHs x $340.84 $2,999,392; Variable overhead allocated to Bottom 9,700 MHs x $340.84 $3,306,148 Assuming overhead is allocated using activity-based costing method: Activity Cost Pool Setting up machines Processing sales orders Warehousing Operating machines Shipping Suitable Cost Driver Production runs Sales orders received Units held in inventory Machine-hours Units shipped Volume Activity Rate Cost $2,400,000 $1,680,000 $2,340,000 $1,250,000 $851,000 50 $48,000 Per Setup 800 $2,100 Per Sales order 390 $6,000 Per Units held [$2,400,000/ 50] [$1,680,000/ 800] [$2,340,000/ 390] 25,000 37,000 $50 Per Machine hour [$1,250,000 25,000] $23 Per Shipping [$851,000 /37,000]

XYZ Company Segmented Income Statement Top Middle Bottom Total Sales revenue $8,900,000 $14,000,000 $14,500,000 $37,400,000 Variable Expenses $2,700,000 $4,500,000 $3,100,000 $10,300,000 Direct costs Direct labor cost Variable overhead: $590,000 $890,000 $1,720,000 $3,200,000 Setting up machines Processing sales orders Warehousing Operating machines Shipping $432,000 $357,000 $660,000 $325,000 $207,000 $960,000 $903,000 $1,080,000 $440,000 $437,000 $1,008,000 $420,000 $600,000 $485,000 $207,000 $2,400,000 [9 x $48,000; 20 x $48,000; 21 x $48,000] $1,680,000 [170 x $2,100; 430 x $2,100; 200 x $2,100] $2,340,000 [110 x $6,000; 180 x $6,000; 100 x $6,000] $1,250,000 [6,500 x $50; 8,800 x $50; 9,700 x $50] $851,000 [9,000 x $23; 19,000 x $23; 9,000 x $23] Total variable expenses 5,271,000 $9,210,000 $7,540,000 $22,021,000 Contribution margin Organization's administrative expenses Gross profit $3,629,000 $4,790,000 $6,960,000 $15,379,000 [Sales - Variable Exps.] $6,100,000 [Not allocated] $9,279,000