Question

DP, Inc. produces parts for industrial grinders. The typical product goes through two processes, machining and finishing, before being packaged and shipped to the customer. DP holds no finished goods inventory. All production is triggered by a customer order. The company uses a traditional cost system and applies overhead to jobs based on machine hours.

The cost accounting manager at DP has been considering updating its cost system given the growth in overhead costs. He has collected data on the major categories of overhead. The estimated annual costs follow.

Overhead Category	Annual Cost
Material handling	$	14,250,000
Machining		28,500,000
Finishing		9,500,000
Shipping		7,125,000
Setups		16,625,000
Total	$	76,000,000

As part of the effort to determine whether it would be worthwhile to update the cost system, the cost accounting manager has collected data on three representative jobs completed in April. Data on those jobs follow.

	Job 0404			Job 0407			Job 0411
Direct material	$	41,700		$	71,000		$	131,500
Machine hours		1,750			2,150			4,000
Units		1,150			1,350			2,150
Production runs		1			3			1
Orders		1			2			1

The cost accounting manager has a tentative design for an ABC system to replace the current cost system. His system has five activities. Data on the activities and the cost drivers for each activity are given as follows.

Activity	Cost Driver	Annual Cost Driver Volume
Material Handling	Material cost	$	28,500,000
Machining	Machine hours		950,000
Finishing	Units		125,000
Shipping	Orders		100
Setups	Production runs		175

Required:
a. What is the unit cost for each of the three jobs assuming DP, Inc. continues to use its current costing system?
b. What is the unit cost for each of the three jobs assuming DP, Inc. adopts the ABC system as designed by the cost accounting manager? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

a. What is the unit cost for each of the three jobs assuming DP, Inc. continues to use its current costing system?

	Job 0404	Job 0407	Job 0411
Direct materials	$    41,700	$    71,000	$ 131,500
Overhead cost
(1750 MH * $80)	$ 140,000
(2150 MH * $80)		$ 172,000
(4000 MH * $80)			$ 320,000
Total Cost	$ 181,700	$ 243,000	$ 451,500
÷ Units	$      1,150	$      1,350	$      2,150
Unit Cost	$          158	$          180	$          210

Explanations :-

Overhead Rate per MH
Total Overhead	$ 76,000,000
÷ Total Machine Hours	$        950,000
	$                  80

b. What is the unit cost for each of the three jobs assuming DP, Inc. adopts the ABC system as designed by the cost accounting manager? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

	Job 0404	Job 0407	Job 0411
Direct materials	$    41,700	$    71,000	$ 131,500
Overhead cost	$ 327,000	$ 630,100	$ 515,400
Total Cost	$ 368,700	$ 701,100	$ 646,900
÷ Units	$      1,150	$      1,350	$      2,150
Unit Cost	$    320.61	$    519.33	$    300.88

Explanations :-

Activity	Overhead cost (A)	Cost Driver (B)		Cost per Driver (C) = (A)/(B)
Material Handling	$            14,250,000	$     28,500,000	Material cost	$                              0.50
Machining	$            28,500,000	950000	MH	$                            30.00
Finishing	$              9,500,000	125000	Units	$                            76.00
Shipping	$              7,125,000	100	Orders	$                   71,250.00
Setups	$            16,625,000	175	Prod. Runs	$                   95,000.00
	$            76,000,000

Activity	Job 0404 (A)		Job 0407 (B)		Job 0411 (C)		Cost per Driver (D)	Cost Allocate to Job 0404 (A*D)	Cost Allocate to Job 0404 (B*D)	Cost Allocate to Job 0404 (C*D)
Material Handling	$         41,700	Material cost	$        71,000	Material cost	$       131,500	Material cost	$               0.50	$                 20,850	$                      35,500	$               65,750
Machining	1750	MH	2150	MH	4000	MH	$             30.00	$                 52,500	$                      64,500	$            120,000
Finishing	1150	Units	1350	Units	2150	Units	$             76.00	$                 87,400	$                   102,600	$            163,400
Shipping	1	Orders	2	Orders	1	Orders	$    71,250.00	$                 71,250	$                   142,500	$               71,250
Setups	1	Prod. Runs	3	Prod. Runs	1	Prod. Runs	$    95,000.00	$                 95,000	$                   285,000	$               95,000
								$               327,000	$                   630,100	$            515,400