Question

Glassworks Inc. produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following data.

  

	Rounded Edge				Squared Edge					Total
Direct materials		$	9,500			$	21,800		$	31,300
Direct labor			6,000				11,800			17,800
Overhead (300% of direct labor cost)			18,000				35,400			53,400
Total cost		$	33,500			$	69,000		$	102,500
Quantity produced			10,400	ft.			14,000	ft.
Average cost per ft. (rounded)		$	3.22			$	4.93

  

Glassworks's controller wishes to apply activity-based costing (ABC) to allocate the $53,400 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly from that reported above. She has collected the following information.

  

Overhead Cost Category (Activity Cost Pool)	Cost
Supervision		$	2,136
Depreciation of machinery			28,520
Assembly line preparation			22,744
Total overhead		$	53,400

  

She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines. (Round activity rate and cost per unit answers to 2 decimal places.)

  

		Usage
Overhead Cost Category   (Activity Cost Pool)	Driver	Rounded Edge			Squared Edge			Total
Supervision	Direct labor cost ($)	$	6,000		$	11,800		$	17,800
Depreciation of machinery	Machine hours		300	hours		800	hours		1,100	hours
Assembly line preparation	Setups (number)		31	times		94	times		125	times

  
Required:

Answer 1

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Calculation of overhead costs as per ABC
		A	B	C=A/B	D	E=C*D	F	G=F*C
Activity Cost Pool	Driver	Actual Cost	Total Usage	Activity rate	Rounded Edge Usage	Rounded Edge Cost	Squared Edge Usage	Squared Edge Cost
Supervision	Direct Labor Cost	2,136.00	17,800.00	0.12	6,000	720	11,800.00	1,416.00
Depreciation of Machinery	Machine Hours	28,520.00	1,100.00	25.93	300	7,778	800.00	20,741.82
Assembly Line operation	Setups (number)	22,744.00	125.00	181.95	31	5,641	94.00	17,103.49
Total Overheads		53,400.00				14,138.69		39,261.31
Direct Material Cost						9,500.00		21,800.00
Direct Labor Cost						6,000.00		11,800.00
Total Cost						29,638.69		72,861.31	H
Quantity produced						10,400.00		14,000.00	I
Cost per ft.						2.85		5.20	J=H/I
Cost per ft. as per absorption costing						3.22		4.93
Variance						(0.37)		0.27
Conclusion: Activity based costing is to be used because it depict the true of cost of the products. It will help Glassworks Inc. to make better profitability and production plan.