Activity-based costing MedTech, Inc., manufactures and sells diagnostic equipment used in the medical profession. 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 four manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $25 per hour and that there were no beginning inventories. The following information was available for 2010, based on an expected production level of 100,000 units for the year:
Activity (Cost Driver) | Budgeted Costs for 2010 | Cost Driver Used as Allocation Base | Cost Allocation Rate |
Materials handling Milling and grinding Assembly and inspection Testing | $1,200,000 2,200,000 1,500,000 300,000 | Number of parts used Number of machine hours Direct labor hours worked Number of units tested | $ 2.00 per part 11.00 per hour 5.00 per hour 3.00 per unit |
The following production, costs, and activities occurred during the month of August:
Units Produced/Tested | Direct Materials Costs | Number of Parts Used | Machine Hours | Direct Labor Hours |
10,000 | $900,000 | 62,000 | 18,000 | 35,000 |
Required:
a. Calculate the total manufacturing costs and the cost per unit produced and tested during the month of August for MedTech, Inc.
b. Explain the advantages of the ABC approach relative to using a single predetermined overhead application rate based on direct labor hours. (Note: You do not have to calculate the overhead that would be applied for the month of August using this alternative method.)
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