Problem

Activity-based costing versus traditional overhead allocation methodsGalvaset Industries m...

Activity-based costing versus traditional overhead allocation methodsGalvaset Industries manufactures and sells custom-made windows. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $20 per hour and that there were no beginning inventories. The following information was available for 2010, based on an expected production level of 50,000 units for the year, which will require 200,000 direct labor hours:

Activity

(Cost Driver)

Budgeted

Costs for 2010

Cost Driver Used

as Allocation Base

Cost

Allocation Rate

Materials handling

Cutting and lathe work

Assembly and inspection

$ 325,000

2,340,000

5,000,000

Number of parts used

Direct labor hours

$ 0.25 per part

1.80 per part

25.00 per hour

The following production, costs, and activities occurred during the month of March:

Units

Produced

Direct

Materials Costs

Number

of Parts Used

Direct

Labor Hours

3,800

$142,000

83,600

17,180

Required:

a.Calculate the total manufacturing costs and the cost per unit of the windows produced during the month of March (using the activity-based costing approach).

b. Assume instead that Galvaset Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity-based costing system previously described). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of March. (Hint: You will need to calculate the predetermined overhead application rate using the total budgeted overhead costs for 2010.)

c. Compare the per unit cost figures calculated in parts a and b. Which approach do you think provides better information for manufacturing managers? Explain your answer.