Question

Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each
category for next year are as follows:
Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs
for each category for next year are as follows:

Maintenance £120,000
Materials handling £18,000
Setups £16,000
Inspection £60,000
The company has been asked to determine the full cost for a proposed job. Estimates for the proposed job
are as follows:
Direct materials £2,000
Direct labor (600 hours) £6,000

As the information provided above, now, the business manager is considering using activity-based costing,
and the expected activity for the four activity-based cost drivers that would be used by whole business are as
follows:
Machine hours 5,000
Material moves 600
Setups 200
Quality inspections 1,000

And the estimates for the proposed job are as follows:
Direct materials £2,000
Direct labor (600 hours) £6,000
Number of machine hours 80
Number of materials moves 4
Number of setups 8
Number of inspections 6

Required:
a. Currently, 20,000 direct labor hours are budgeted for whole business next year. Please calculate the full
cost for the job if Wheat Manufacturing uses the direct labor hours as the basis to absorb overheads. (
b. Calculate the full cost for the job if Wheat Manufacturing uses activity-based method to allocate
overheads.
c. How does activity-based costing (ABC) differ from the traditional approach? Please comment on the
underlying difference between their philosophies and the key concern to choose appropriate approach in
practice.

Answer 1