Question

Problem #3 15 Points William Company is contemplating the establishment of an activity-based costing (ABC) system. It currently applies all overhead costs based on direct labor costs. The company has estimated the following costs and activities for May: Table 1: | Cost Activity Machine Setups $33,600 400 setups Utilities 60,000 200,000 usage hours Materials Handling 84,000 12,500 crates Direct labor 35,520 $20 per labor hour Direct material 60,000 $1 per pound Direct labor cost is $20 per hour. The following information pertains to the actual production of buckets and pails during May: Page 2 of 3 Table 2: Buckets Units produced 60,000 Direct material cost incurred $30,000 Direct labor cost incurred ($20 per hour) | $24,000 Setups implemented 120 Crates handled 6,800 Utility hours used 80,000 Pails 40,000 $31,200 $12,000 290 5,200 125,000 a. 1. Which items are cost pools? 2. Which are cost drivers? 3.Which are cost objectives? b. How much is the product cost per pail if William Company uses one cost pool to allocate all overhead costs to the cost objectives? How much is the product cost per pail if William Company uses ABC?

Answer 1

Using traditional approach: la) Cost pools are pool of activities seggregated and used in calculating activity rate for each cost pool in ABC (activity-based costing) method. Therefore, cost pools are: Cost Pools: Machine setups Utilities Materials handling 1b) Cost drivers are volume of each cost pool based on which activity rate per cost driver shall be calculated in ABC (activity-based costing) method. Therefore, cost drivers are: Cost drivers: Setups Utility hours Crates 1c) Cost objects are products or departments for which all product costs including direct materails, direct labors and manufacturing overheads are accumulated. Therefore, cost objects are: Cost objects: Buckets Pails

2) Total overhead costs incurred Total direct labor hours worked Predetermined overhead rate labor hour $177,600 1,776 $100 ($177600 / 1776 labor hours] Direct labor hours worked for the job Predetermined overhead rate labor hour Overhead cost allocated Direct materials Direct labors Total product cost Number of units produced Product cost per unit Buckets 1,200 $100.00 $120,000 $30,000 $24,000 $174,000 60,000 $2.90 Pails 600 --> (a) $100.00 --> (b) [As calculated above] $60,000 --> (a) (b) $31,200 $12,000 $103,200 --> (p) 40,000 --> (9) $2.58 --> (p) / (9) 3) Using Activity-Based approach: Activity Machine setups Utilities Materials handling Total Cost $33,600 $60,000 $84,000 $177,600 Volume Activity Rate 400 $84.00 [$33600 / 400] 200,000 $0.30 [$60000 / 200000] 12,500 $6.72 ($84000 / 12500]

Therefore, Overhead costs: Machine setups Utilities Materials handling Overhead costs allocated Direct materials Direct labors Total product cost Number of units produced Product cost per unit $10,080 $24,000 $45,696 $79,776 $30,000 $24,000 $133,776 60,000 $2.23 $24,360 (120 Setups x $84; 290 Setups x $84] $37,500 [80000 Utility hours x $0.3; 125000 Utility hours x $0.3] $34,944 [6800 Crates x $6.72; 5200 Crates x $6.72] $96,804 $31,200 $12,000 $140,004 --> (p) 40,000 --> (9) $3.50 --> (p)/(a)