Question

ACTIVITY BASED ACCOUNTING

The Columbus Company produces only two products: a major computer part and cell phones. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products.

The company expects to produce 3,900 computer parts and 2,220 cell phones during the next year. Each computer part requires 2.25 direct labor hours to produce and each cell phone requires 0.75 hour to produce.

The direct material and direct labor costs included in the two products are as follows:

Item	Computer Part	Cell-Phone
Direct Material (per unit)	$29	$19.20
Direct Labor (per unit)	$18.10	$ 4.50

Budgeted (Estimated) Total Factory Overhead Data For the year:

Activity	Budgeted Overhead Dollars	Estimated Volume Level
Production Setups	$79,300	22 setups
Material Handling	$69,900	4,900 lbs.
Packaging and Shipping	$119,400	5,925 boxes
Total Factory Overhead	$268,600

Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows for the year:

Activity	Computer Parts	Cell Phones	Overall Totals
Production Setups	5 setups	15 setups	20 setups
Material Handling	1,000 lbs.	4,000 lbs.	5,000 lbs.
Packaging and Shipping	4,000 boxes	2,000 boxes	6,000 boxes

Required:

1. Calculate the cost of each product using a plant-wide rate based on direct labor hours.

2. Calculate the activity cost rates for (a) setups, (b) material handling and (c) packaging and shipping.

3. Cost out the two products using an activity-based costing system.

Answer 1

1	OH Rate	$25.73
	(Total Budgeted Overhead Dollars/Total Budgeted Direct Labor Hours)
	($268,600/10,440)
	Total budgeted DLH
	3,900 computer parts x 2.25 DLH per part	8,775
	2,220 cell phones x 0.75 DLH per phone	1,665
		10,440
		Computer Parts	Cell Phones
	Direct Material	$29.00	$19.20
	Direct labor	$18.10	$4.50
	Manufacturing Overhead	$57.90	$19.30
	Total Unit cost	$105.00	$43.00
2
	Cost Item	Budgeted Overhead	Estimated Volume	Activity Cost
	Production Setups	$79,300	22	3604.55
	Material Handling	$69,900	4,900	14.27
	Packaging and Shipping	$119,400	5,925	20.15
3		Computer Parts	Cell Phones
	Direct Material	$113,100.00	$42,624.00
	Direct labor	$70,590.00	$9,990.00
	Manufacturing Overhead
	Production Setups	$18,022.75	$54,068.25
	Material Handling	$14,270.00	$57,080.00
	Packaging and Shipping	$80,600.00	$40,300.00
	Total cost	$296,582.75	$204,062.25
	Total Units Produced	3,900	2,220
	Total Cost Per Unit	$76.05	$91.92