Northwest Company produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following data.
| Rounded Edge | Squared Edge | Total |
Direct materials | $19,000 | $ 43,200 | $ 62,200 |
Direct labor | 12,200 | 23,800 | 36,000 |
Overhead (300% of direct labor cost) | 36,600 | 71,400 | 108,000 |
Total cost | $67,800 | $138,400 | $206,200 |
Quantity produced | 10,500 ft. | 14,100 ft. |
|
Average cost per ft | $ 6.46 | $ 9.82 |
|
Northwest’s controller wishes to apply activity-based costing (ABC) to allocate the $108,000 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly from that reported above. She has collected the following information.
Overhead Cost Category (Activity Cost Pool) | Cost |
Supervision | $ 5,400 |
Depreciation of machinery | 56,600 |
Assembly line preparation | 46,000 |
Total overhead | $108,000 |
She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines.
Overhead Cost Category (Activity Cost Pool) |
|
| Usage |
|
Driver | Rounded Edge | Squared Edge | Total | |
Supervision Depreciation of machinery Assembly line preparation | Direct labor cost($) Machine hours Setups (number) | $12,200 500 hours 40 times | $23,800 1,500 hours 210 times | $36,000 2,000 hours 250 times |
Required
1. Assign these three overhead cost pools to each of the two products using ABC.
2. Determine average cost per foot for each of the two products using ABC.
3. Compare the average cost per foot under ABC with the average cost per foot under the current method for each product. Explain why a difference between the two cost allocation methods exists.
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