Question

Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller’s staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool.

Cost Pools	Costs			Activity Drivers
Incoming inspection	$	182,000		Direct material cost
Production		1,800,000		Machine-hours
Machine setup		797,500		Setups
Shipping		483,000		Units shipped

The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM.

	Products
		308			510
Total direct material costs	$	55,000		$	36,000
Total direct labor costs	$	177,000		$	207,000
Total machine-hours		64,000			86,000
Total number of setups		60			85
Total pounds of material		18,700			9,700
Total direct labor-hours		6,700			9,700
Number of units produced and shipped		32,000			10,000

Required:

a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?
b. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant?
c. What unit product costs will be reported for the two products if the ABC system suggested by the cost accountant’s classification of cost pools is used?
d. If management should decide to implement an activity-based costing system, what benefits should it expect?

Answer 1

d) answer :

1) if management uses the activity based costing system it is very easy to know the each activity toverhead rate of cost pool.

2) it is useful to know , which activity consumes more overhead cost

3) allocation of overhead is is more reliable compared to traditional costing system