Dixon Robotics manufactures three robot models: the A3B4. the BC11. and the C3PO. Dixon allocates manufacturing overhead to each model based on machine hours. A large portion of the company’s manufacturing overhead costs is incurred by the Maintenance Department. This year, the department anticipates that it will incur $100,000 in total costs. The following estimates pertain to the upcoming year:
Model | Estimated Machine-Hours | Estimated Units of Production |
A3B4 | 20,000 | 6,250 |
BC11 | 15,000 | 5,000 |
C3PO | 5,000 | 2,500 |
Ed Smith. Dixon’s cost accountant, suspects that unit costs are being distorted by using a single activity base to allocate Maintenance Department costs to products. Thus he is considering the implementation of activity-based costing (ABC).
Under the proposed ABC method, the costs of the Maintenance Department would be allocated to the following activity cost pools using the number of work orders as an activity base: (1) the repairs pool and ( 2) the janitorial pool. Of the 2.000 work orders filed with the Maintenance Department each year, approximately 400 relate to repair activities, and 1,600 relate to janitorial activities.
Machinery repairs correlate with the number of production runs of each robot model. Thus the repairs pool would be allocated to robots based on each model’s corresponding number of production runs. Janitorial services correlate with square feet of production space. Thus the janitorial pool, would be allocated to products based on the square feet of production space devoted to each robot model. The following table provides a summary of annual production run activity and square footage requirements:
Model | Estimated Number of Production Runs | Estimated Square Feet of Production Space Used |
A3B4 | 50 | 5,000 |
BC11 | 150 | 10,000 |
C3PO | 200 | 25,000 |
Instructions
a. Calculate the amount of Maintenance Department costs that would be allocated to each robot model (on a per-unit basis) using machine-hours as a single activity base.
b. Calculate the amount of Maintenance Department costs that would be allocated to each robot model ion a per-unit basis) using the proposed ABC method.
c. Are cost allocations distorted using machine-hours as a single activity base? Explain your answer.
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