Question

Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs. Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below area sample of possible cost pools for Waterways. Assembling Payroll Billing Plant supervision Digging trenches Product design Janitorial Purchasing materials Machine maintenance Selling Machine setups Testing Molding Welding Packaging

Answer 1

ANSWER

Statement showing Overhead rates and the actual cost assigned under ABC Costing
Activity Cost Pools	Cost Drivers	Estimated Overhead	Expected Cost Drivers	Activity based overhead rates	Actual No. Of Cost Drivers involved	Actual cost assigned
		A	B	C = B/A	D	E = C x D
Irrigation Installation	Labor cost	1,928,440	13,030	148	13,010	1,925,480
Machining	Machine Hours	1,668,750	33,375,000	0	33,376,000	1,668,800
Customers orders	Number of orders	28,600	2,600	11	2,562	28,182
Shipping	none	NA	NA	NA	NA	NA
Design	Cost per design	763	7	109	6	654
Selling	number of sales calls	306,000	20,400	15	20,610	309,150

Under ABC costing there are 4 types of activities, namely

1. Unit level activities: - These are incurred each and every time a product is performed.
2. Batch level activities:- These are incurred on the basis of batch designated for the production of product or provision of services.
3. Product level activities:- These costs are differentiated on the basis of different products. In other words, there costs are product specific.
4. Facility level activities:- These are not product specific, rather these are the actions taken to maintain the operations of business

Based on the above definition, activities have been classified as: -

Activities	Level of activity
Testing of products (if all items are tested)	Unit Level
Testing of products (if all items are not tested)	Batch Level
Designing new products	Product Level
Packaging	Facility Level
Molding	Product Level
Assembling	Product Level
Depreciation	Facility Level
Machine Maintenance	Facility Level
Advertising	Facility Level
Equipment Setups	Batch Level
Electricity required to run equipment	Facility Level
Requisitioning Materials	Unit Level

Note: - Classification may change subject to difference in opinion and assumption supporting the classification.

Answer 2