Question

A manufacturing company has two Divisions: Amateur and Pro. Estimated activity for the next year is:

                                                Amateur              Pro               Company Total

                                                Division           Division           (Amateur + Pro)

Direct Labour hours:               9,000 hrs        1,000 hrs         10,000 hrs

Maching Hours:                      2,700 hrs           600 hrs            3,300 hrs

Units Produced:                          800 units        100 units            900 units

Production Batches:                        1 batch         49 batches         50 batches          

Costs: Labour:            $144,000

Set-ups:           $    7,500

Machining:      $ 33,000

Total costs:      $184,500

Other information:                                         

• The Amateur division makes products on a continual basis throughout the year.
• The Pro division makes products in batches based on demand.
• Both divisions use the same machines and the same employees.
• There are no materials.
• A set-up is required for each production batch.
• Machining costs are allocated based on Machine hours.

Required

1. What is the cost of a unit for each of the Amateur and Pro Divisions, assuming that total costs are captured in a single cost pool allocated on the basis of Direct Labour Costs (ie, no ABC)?

2. What is the cost of a unit for each of the Amateur and Pro Divisions, assuming that the company uses Activity Based Costing?

Answer 1

SOLUTION

A. Cost per Direct Labor Hour = Total Cost / Total Direct Labor Hour

= $184,500 / 10,000 = $18.45

	Amateur Divisions	Pro Divisions
Direct Labor Hours	9,000	1,000
Total Cost Allocation = Cost per Direct Labor Hour * Direct Labor Hours (A)	166,050	18,450
Units Produced (Units) (B)	800	100
Cost per Unit ($) (A/B)	207.56	184.50

B. Calculation of Cost Driver Rate-

Activity Pool Cost	Cost	Cost driver	Number of Activities	Rate Per Activity = Cost / Number of Activities
Labor	144,000	Direct Labor Hours	10,000 Direct labor Hours	$14.40 per Direct labor Hour
Set-ups	7,500	Number of Batches	50 Batches	$150.00 per Batch
Machining	33,000	Number of Machine Hours	3,300 Machine Hours	$10.00 per Machine Hour

Calculation of Cost per unit using Activity Based Costing-

	Amateur Division	Amateur Division	Amateur Division	Pro Division	Pro Division	Pro Division
Costs	Number of Activities (A)	Activity Rate (B)	Cost (A*B)	Number of Activities (A)	Activity Rate (B)	Cost (A*B)
Labor	9,000	14.40	129,600	1,000	14.40	14,400
Set-ups	1	150.00	150	49	150.00	7,350
Machining	2,700	10.00	27,000	600	10.00	6,000
Total Overhead Cost (A)			156,750			27,750
Number of Units (B)			800			100
Cost per Unit			195.94			277.50