Question

VanManufacturing Inc. produces smart pizza oven. In the current period, 750 ovens were assembled.The current production run required 1500 machine hours. The production machines require four "set-ups" for recalibration. Quality checks required 100 hours of final inspection activity. Overhead is estimated at $40 per machine hour, plus $1,000 per "set-up," and $50 per inspection hour. Direct materials and direct labor total $500 per oven.
(a)	Apply activity-based costing and determine the amount assigned to an oven.
(b)	For GAAP purposes, VanManufacturing applies traditional costing methods, and allocates overhead at $60 per machine hour. How much cost would be assigned to the 750 ovens? What is the per unit cost of an oven under the traditional approach? What might explain the higher cost assignment, and how could this influence business decision making?

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Van Manufacturing Inc.
Answer a- Activity-based costing
Allocation table		A	B	C=A*B
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Note
Machine Hours	Machine Hours	40.00	1,500.00	60,000.00
Recalibration	Number of setups	1,000.00	4.00	4,000.00
Quality Checks	Inspection Hours	50.00	100.00	5,000.00
Total Cost assigned				69,000.00	D
Number of ovens				750.00	E
Costs assigned per oven				92.00	F=D/E
Answer b	Amount $	Note
Machine Hours	1,500.00	G
Overhead application rate	60.00	H
Total Cost assigned	90,000.00	I=G*H
Number of ovens	750.00	See E
Costs assigned per oven	120.00	J=I/E

Explanation: Higher cost is assigned because instead of tracking activity wise cost plant wide overhead rate is taken and applied on the basis of machine hours used. This increased total cost assigned though actual cost may be less and it will be identified in the later stage. This will affect decision making because cost will be high so sell price has to be high which may affect demand of the product.