Question

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 120,000 units of the Sport model and 50,000 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 15 percent.

Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility

		Cost Driver Volume
Activity	Cost Driver	Sport	Pro	Total
Assembly building
Assembling	Machine-hours	8,000	32,000	40,000
Setting up machines	Setup hours	60	600	660
Handling material	Production runs	28	60	88
Packaging building
Inspecting and packing	Direct labor-hours	68,000	26,800	94,800
Shipping	Number of shipments	120	240	360

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

	Sport				Pro
Direct material	$	1,520,000			$	2,440,000
Direct labor
Assembly	$	770,000			$	640,000
Packaging		1,010,000				400,000
Total direct labor	$	1,780,000			$	1,040,000
Direct costs	$	3,300,000			$	3,480,000
Overhead
Assembly building
Assembling (@ $30 per MH)	$	240,000			$	960,000
Setting up machine (@ $900 per setup hour)		54,000				540,000
Handling material (@ $3,000 per run)		84,000				180,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour)		340,000				134,000
Shipping (@ $1,320 per shipment)		158,400				316,800
Total ABC overhead	$	876,400			$	2,130,800
Total ABC cost	$	4,176,400			$	5,610,800
Number of units		120,000				50,000
Unit cost	$	34.80			$	112.22

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.

Sport: ?

Pro: ?

Answer 1

The computation of amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing.is shown below:-

The overhead cost will stay the same for the following activities because it is the same as the third quarter.
Assembling (@ 30 per MH)
Setting up machine (@ 900 per setup hour)
Handling material (@ 3,000 per rum)
Inspecting and Packing (@ 5 per direct labor-hour)
Shipping (@ $1,320 per shipment)

Here, there is a change for setting up machine which is shown below also it has been provided that in the first quarter it has been declined by 15%
Sport = (1 - Reduced percentage) * Setting up machine cost
= (1 - 15%) * $54,000
= 0.85 * $54,000
= $45,900
Pro = (1 - Reduced percentage) * Setting up machine cost
= (1 - 15%) * $540,000
= 0.85 * $540,000
= $459,000

Now,
Total activity-based costing overhead
Sport = Assembling cost + Sport (calculated above) + Handling material cost + Inspecting and packing cost + Shipping cost
= $240,000 + $45,900 + $84,000 + $340,000 + $158,400
= $868,300
Pro = Assembling cost + Sport (calculated above) + Handling material cost + Inspecting and packing cost + Shipping cost
= $960,000 + $459,000 + $180,000 + $134,000 + $316,800
= $2,049,800