Question

In: Accounting

After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing...

After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 100,000 units of the Sport model and 40,000 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 25 percent.

Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility

Cost Driver Volume
Activity Cost Driver Sport Pro Total
Assembly building
Assembling Machine-hours 6,000 30,000 36,000
Setting up machines Setup hours 40 400 440
Handling material Production runs 8 40 48
Packaging building
Inspecting and packing Direct labor-hours 60,000 22,800 82,800
Shipping Number of shipments 100 200 300

Third Quarter Unit Cost Report, Activity-Based Costing—CenterPoint Manufacturing Facility

Sport Pro
Direct material $ 1,500,000 $ 2,400,000
Direct labor
Assembly $ 750,000 $ 600,000
Packaging 990,000 360,000
Total direct labor $ 1,740,000 $ 960,000
Direct costs $ 3,240,000 $ 3,360,000
Overhead
Assembly building
Assembling (@ $30 per MH) $ 180,000 $ 900,000
Setting up machine (@ $900 per setup hour) 36,000 360,000
Handling material (@ $3,000 per run) 24,000 120,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour) 300,000 114,000
Shipping (@ $1,320 per shipment) 132,000 264,000
Total ABC overhead $ 672,000 $ 1,758,000
Total ABC cost $ 3,912,000 $ 5,118,000
Number of units 100,000 40,000
Unit cost $ 39.12 $ 127.95

Required:

a. Compute the amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900.

please show explanation

Solutions

Expert Solution

Answer:

Assembly building
Assembling (@ $30 per MH) $ 180,000 $    900,000
Setting up machine (@ $900 per setup hour) $   27,000 $    270,000
Handling material (@ $3,000 per run) $   24,000 $    120,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour) $ 300,000 $    114,000
Shipping (@ $1,320 per shipment) $ 132,000 $    264,000
Total ABC overhead $ 663,000 $ 1,668,000

Calculations:

Assembly building
Assembling (@ $30 per MH) =6000*30 =30000*30
Setting up machine (@ $900 per setup hour) =900*40*75% =900*400*75%
Handling material (@ $3,000 per run) =3000*8 =3000*40
Packaging building
Inspecting and packing (@ $5 per direct labor-hour) =5*60000 =5*22800
Shipping (@ $1,320 per shipment) =1320*100 =1320*200

In case of any doubt, please feel free to comment.


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