Question

Donald Trump’s Company has budgeted manufacturing overhead costs of $3,000,000. It has allocated overhead on a plant-wide basis to its two products (The Wall and The Wig) using machine hours, which are estimated to be 100,000 for the current year. The company has decided to experiment with activity-based costing and has created five activity cost pools and related activity cost drivers as follows:

Activity	Cost Driver	Estimated Overhead	Expected Activity
Material handling	Number of moves	$250,000	50,000
Purchase orders	Number of orders	$200,000	4,000
Product testing	Number of tests	$450,000	10,000
Machine set-up	Number of set-ups	$600,000	6,000

Machining

Machine hrs

$1500,000

100,000 hrs

	Wall	Wig
Direct materials costs	$125	$220
Direct labour costs	$110	$150
Purchase orders	2	3
Machine set-up	5	10
Product testing	3	4
Machining	50	50
Materials handing	5	10

a. Under traditional product costing using machine hours, calculate the total manufacturing cost per unit of both products.

b.Under ABC, prepare a schedule showing the calculation of the activity-based overhead rates (per cost driver).

c. Calculate the total manufacturing cost per unit for both products under ABC.

(That's the whole question and no further information.)

Answer 1

TRADITIONAL COSTING SYSTEM
ALLOCATED OVERHEAD RATE = (TOTAL OVERHEAD/ TOTAL MACHINE HOUR)
($3000000/100000) =$30/ HOUR
		WALL	WIG
DIRECT MATERIAL COST		$                               125.00	$              220.00
DIRECT LABOR COST		$                               110.00	$              150.00
OVERHEAD COST		$                            1,500.00	$           1,500.00
(MACHINE HOUR X OVERHEAD RATE)		(50 X $30)	(50 X $30)
TOTAL COST PER UNIT		$                            1,735.00	$           1,870.00
ABC RATE CALCULATION
COST ITEM	COST	TOTAL COST DRIVER	ABC RATE
MATERIAL HANDLING	$     250,000.00	50,000.00	$                   5.00	PER MOVES
PURCHASE ORDER	$     200,000.00	4,000.00	$                50.00	PER ORDER
PRODUCT TESTING	$     450,000.00	10,000.00	$                45.00	PER TEST
MACHINE SET-UP	$     600,000.00	6,000.00	$              100.00	PER SETUP
MACHINING	$ 1,500,000.00	100,000.00	$                15.00	PER MACHINE HOUR
OVERHEAD COST AS PER ABC METHOD
	WALL			WIG
COST ITEM	COST RATE	NO/HOUR OF ACTIVITY	COST	COST RATE	NO/HOUR OF ACTIVITY	COST
MATERIAL HANDLING COST	$                  5.00	5	$                25.00	$                            5.00	10	$                   50.00
PURCHASE ORDER	$                50.00	2	$              100.00	$                         50.00	3	$                 150.00
PRODUCT TESTING	$                45.00	3	$              135.00	$                         45.00	4	$                 180.00
MACHINE SET UP	$             100.00	5	$              500.00	$                       100.00	10	$             1,000.00
MACHINING	$                15.00	50	$              750.00	$                         15.00	50	$                 750.00
			$         1,510.00			$           2,130.00
PRODUCT COST ABC SYSTEM		WALL			WIG
MATERIAL COST		$                               125.00				$                 220.00
LABOUR COST		$                               110.00				$                 150.00
OTHER OVERHEAD		$                            1,510.00				$             2,130.00
TOTAL COST PER UNIT		$                          1,745.00				$           2,500.00