In: Accounting
Direct labor or machine hours may not be the appropriate cost
driver for overhead in all areas of manufacturing due to the
complexities of many manufacturing processes. Many companies use
activity-based costing (ABC) which uses multiple drivers (items
that consume resources) rather than just one driver to apply
overhead to their activities. With ABC, a company can use a cost
driver that has a direct cause/effect relationship in its applied
overhead costs.
Waterways looked into ABC as a method of costing because of the
variety of items it produces and the many different activities in
which it is involved. The activities listed below area sample of
possible cost pools for Waterways.
Assembling | Payroll | |
Billing | Plant supervision | |
Digging trenches | Product design | |
Janitorial | Purchasing materials | |
Machine maintenance | Selling | |
Machine setups | Testing | |
Molding | Welding | |
Packaging |
Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways. (Round answers to 2 decimal places, e.g. 12.25.)
WATERWAYS CORPORATION | ||||||||
Activity Cost Pools |
Cost Drivers | Estimated Overhead |
Expected Use of Cost Drivers per Activity |
Actual Use of Drivers |
||||
Irrigation installation | Labor cost | $2,023,400 | 13,400 | 13,381 | ||||
Machining (all machine use) | Machine hours | 1,698,850 | 33,977,000 | 33,978,000 | ||||
Customer orders | Number of orders | 27,280 | 2,480 | 2,447 | ||||
Shipping | none (direct) | N/A | N/A | traced directly | ||||
Design | Cost per design | 896 | 8 | 7 | ||||
Selling | Number of sales calls | 377,400 | 22,200 | 22,380 |
WATERWAYS CORPORATION | ||||
Activity Cost Pools |
Activity- Based Overhead Rates |
Actual Cost Assigned |
||
Irrigation installation |
$ |
$ |
||
Machining (all machine use) | ||||
Customer orders | ||||
Design | ||||
Selling |
eTextbook and Media
How would you classify each of the following activities by level—unit level, batch level, product level, or facility level?
Testing of products (if all items are tested) |
UnitBatchFacilityProduct |
|
Testing of products (if all items are not tested) |
BatchUnitProductFacility |
|
Designing new products |
UnitBatchFacilityProduct |
|
Packaging |
ProductFacilityUnitBatch |
|
Molding |
ProductBatchUnitFacility |
|
Assembling |
FacilityProductBatchUnit |
|
Depreciation |
FacilityUnitProductBatch |
|
Machine maintenance |
FacilityProductUnitBatch |
|
Advertising |
FacilityProductUnitBatch |
|
Equipment setups |
FacilityProductUnitBatch |
|
Electricity required to run equipment |
ProductFacilityUnitBatch |
|
Requisitioning materials |
BatchFacilityUnitProduct |