Question

In: Accounting

Problem 2: ABC Industries uses activity-based costing to assist management in setting prices for the company’s...

Problem 2:

  1. ABC Industries uses activity-based costing to assist management in setting prices for the company’s three major product lines. The following information is available:

                                                                     Expected Use of

Activity Cost Pool   Estimated Overhead          Cost Driver per Activity

Cutting                     $2,000,000              25,000 labor hours

Stitching                    4,000,000              300,000 machine hours

Inspections                2,000,000              150,000 labor hours

Packing                         860,000              60,000 finished goods units

Instructions

Compute the activity-based overhead rates.

  1. Ahmed Industries manufactures dining chairs and tables. The following information is available:

                                          Dining Chairs Tables      Total Cost

          Machine setups             400          1,200           $96,000

          Inspections                   500             900         $140,000

          Labor hours                 5,000            4,000        10,000 hours

Ahmed Industries is considering switching from one overhead rate based on labor hours to activity-based costing.

Instructions

Perform the following analyses for these two components of overhead:

a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate.

b. Compute total machine setups and inspection costs assigned to each product, using activity-based costing.

c. Comment on your findings.

Solutions

Expert Solution

Compute the activity-based overhead rates.
Activity Cost Pool Estimated Overhead (A) Expected Use of Cost Driver per Activity (B) Activity-based overhead rates (A/B)
Cutting $     2,000,000.00                    25,000.00 labor hours $          80.00
Stitching                 $     4,000,000.00                  300,000.00 machine hours $          13.33
Inspections $     2,000,000.00                  150,000.00 labor hours $          13.33
Packing     $        860,000.00                    60,000.00 finished goods units $          14.33

Ahmed Industries manufactures dining chairs and tables. The following information is available:
Dining Chairs Tables Total Cost
Machine setups 400 1200 $        96,000.00
Inspections 500 900 $      140,000.00
  Labor hours    5000 4000            10,000.00 hours
Ahmed Industries is considering switching from one overhead rate based on labor hours to activity-based costing.
Instructions
Perform the following analyses for these two components of overhead:
a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate.
b. Compute total machine setups and inspection costs assigned to each product, using activity-based costing.
c. Comment on your findings.
a) Single overhead rate = ($96000+140000)/10000 hours $                 23.60 per labor hour
Dining chairs:  5000 hrs x $23.60 $        118,000.00
Tables: = 4000 hrs x $23.60 $          94,400.00
b) Activity-based costing
Machine setups: $96000/(400+1200) $                 60.00 per setup
Inspections : $140,000/(500+900) $               100.00 Per inspection
Dining chairs: (400 × $60) + (500 × $100) $          74,000.00
Tables: (1200 x $60) + (900 x $100) $        162,000.00

ekkarill92 answered 2 years ago
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