Question

I need a detailed solution to this.

Neal Construction manufactures and installs standard and custom-made cabinetlry for residential homes. The company estimates manufacturing overhead to be $200,000. Afler implementing activity-based costing (ABC), the company's accountant identified the following related information: Allocation Base Number of deliveries Number of inspcctions Hours of supervisor time Number of purchase orders Activity Material delivery and handling Inspections Supervision Purchasing Proportion of Overhead Cost 30% 25% 20% 25% The number of activities for standard and custom-made cabinets are as follows: Custom-made 100 400 2,200 1,000 Standard 200 Number of deliveries Number of inspections Hours of supervisor time Number of purchase orders 600 1,800 1,000 During the past year, Neal accepted a customcr crder for a set of custom-made cabinets that would require the following Dircct labor cost (25 hours at $15 per hour) Direct materials (wood) (900 ft at $3.00 per foot) Number of deliveries- Number of inspections Hours of supervisor time - Number of purchase orders $ 375 $2,700 3 5 5 3 How much overhead would be applied to the job if traditional costing (plantwide) using direct labor hours as a cost driver were used? Estimated total direct labor hours are 4,000 1 Using the plantwide method, what is the total product (manufacturing) cost for the above customer order? 2. Using activity based costing (ABC), what would be the total overhead applied to the above job? 3. 4. Using ABC, what is the total product (manufacturing) cost for the above customer order? Compare the two methods (plant-wide and ABC) and remark on the difference. 5. Scanned with CamScanner

Answer 1

Solution:

Solution 1) Calculation of overheads to be applied to the job if Traditional Costing using Direct Labour Hours as cost Driver were used.

Overheads to be applied to the job

= (Labour Hours for the Job/ Total Labour Hours) x Total Overhead $

= (25 / 4,000) x $200,000 = $1,250

Therefore, overheads to be applied to the job if Traditional Costing using Direct Labour Hours as cost Driver is $1,250

Solution 2) Calculation of Total Manufacturing Cost for the Job using Direct Labour Hours as cost Driver.

	$
Direct Labour Cost	375.00
Direct Material	2,700.00
Overheads applied to the Job	1,250.00
Total Manufacturing Cost	4,325.00

Therefore, Total Manufacturing cost of the job if Traditional Costing using Direct Labour Hours as cost Driver is $4,325

Solution 3) Calculation of overheads to be applied to the job using Activity Based Costing

Calculation of Overhead Cost under different heads

Activity	Proportion of Overheads Cost %	Cost $ = Proportion of Overheads Cost % / 100 x Total Overhead Cost
Material Delivery and Handling	30	60,000.00
Inspections	25	50,000.00
Supervisions	20	40,000.00
Purchasing	25	50,000.00
		2,00,000.00

Calculation of Rate per Cost Driver

Activity	Cost $	Cost Driver	Number of Cost Drivers (Standard + Custom Made)	Rate Per Cost Driver = Cost $ / Number of Cost Drivers
Material Delivery and Handling	60,000.00	Number of Deliveries	300 Deliveries	$200.00 per Delivery
Inspections	50,000.00	Number of Inspections	1000 Inspections	$50.00 per Inspection
Supervisions	40,000.00	Hours of Supervisor Time	4000 Supervisor Time Hours	$10.00 per Supervisor Time Hour
Purchasing	50,000.00	Number of Purchase Orders	2000 Purchase Orders	$25.00 per Purchase Order
	2,00,000.00

Calculation of overheads to be applied to the job

Activity	Cost Driver	Number of Cost Drivers for the Job	Rate Per Cost Driver	Overhead Cost $ = Number of Cost Drivers for the Job x Rate Per Cost Driver
Material Delivery and Handling	Number of Deliveries	3 Deliveries	200.00	600.00
Inspections	Number of Inspections	5 Inspections	50.00	250.00
Supervisions	Hours of Supervisor Time	5 Supervisor Hours	10.00	50.00
Purchasing	Number of Purchase Orders	3 Purchase Orders	25.00	75.00
				975.00

Therefore, overheads to be applied to the job as per Activity Based Costing is $975

Solution 4) Calculation of Total Manufacturing Cost for the Job using Activity Based Costing

	$
Direct Labour Cost	375.00
Direct Material	2,700.00
Overheads applied to the Job	975.00
Total Manufacturing Cost	4,050.00

Total Manufacturing Cost for the Job using Activity Based Costing is $4,050

Solution 5)

	Cost as per Traditional Allocation $	Cost as per Activity Based Costing $
Direct Labour Cost	375.00	375.00
Direct Material	2,700.00	2,700.00
Overheads applied to the Job	1,250.00	975.00
Total Manufacturing Cost	4,325.00	4,050.00

On comparing the 2 allocation methods, we see that there has been an over absorption of overheads to the job by $275.