Question

Problem 3 (Textbook Reference: P4-4) – Activity-based costing versus traditional costing C&W Corporation manufactures travel clocks and watches. Overhead costs are currently allocated using direct- labor hours, but the controller has recommended using an activity-based costing system based on the following data:

Activity =Production setup, Material handling and requisition, Packaging and shipping ,Total overhead

Cost Driver= Setups, Parts, Units shipped

Cost $ 100,000 $ 30,000 $ 60,000 $ 190,000

Activity Level= Travel Clocks20,24,80,000 Watches 30, 36, 120,000 Required (Traditional Method):

1. Using the traditional cost assignment method, calculate the plant-wide overhead rate using labor-hours as the allocation base. Assume labor-hours required to assemble each unit are 0.5 hours per travel clock and 1.0 hour per watch, and that 80,000 travel clocks and 120,000 watches were produced. Plant-wide overhead rate: $___________________per direct labor hour

2. Under the traditional cost assignment method using the plant-wide overhead rate, how much total overhead cost is allocated to the: Travel clocks: $________________ Watches: $________________ *** Problem 3 is continued on the next page *** Required (ABC Method):

3. Using the Activity-based Costing (ABC) assignment method, calculate the activity cost rates for the following activities: (a) Setup costs: $___________________per production run (b) Materials handling costs: $___________________per part (c) Packaging and shipping costs: $___________________per shipment

4. Using the Activity-based Costing (ABC) assignment method how much total overhead cost is allocated to the: Travel clocks: $________________ Watches: $________________

Answer 1

Activity	Total cost	Cost driver
Production set up	$       100,000	Setups
Material handling	$         30,000	Parts
Packaging and shopping	$         60,000	Units Shipped
Total cost	$      190,000
Cost driver	Travel Clocks	Watches	Total
Setups	20	30	50
Parts	24	36	60
Units Shipped	80,000	120,000	200,000
Solution 1
Calculation of plantwide overhead
	Travel Clocks	Watches	Total
No of watches	80,000	120,000
Labor hour per clock	0.5	1
Total labor hour	40,000	120,000	160,000
Recovery rate=	Total overhead cost/total direct labor hours
Recovery rate=	190000/160000
Recovery rate=	1.1875
Solution 2
Calculation of overhead cost assigned
	Travel Clocks	Watches
Direct labor hours	40,000	120,000
Recovery rate	1.1875	1.1875
Labor hours * recovery rate	47,500	142,500
Solution 3
Calculation of activity wise recovery rate
Activity	Total cost	Cost driver	Driver total	Activity rate=Total cost for each activity/driver total for respective activity
Production set up	$       100,000	Setups	50	$     2,000.00
Material handling	$         30,000	Parts	60	$        500.00
Packaging and shopping	$         60,000	Units Shipped	200,000	$             0.30
Total cost	$      190,000
Solution 4
Cost assigned to Clocks using activity recovery rates
	Setups	Parts	Units Shipped
Travel Clocks	20	24	80000
Watches	30	36	120000
Activity recovery rate	$     2,000.00	$                 500.00	$           0.30
	Setups	Parts	Units Shipped	Total
Travel Clocks	$         40,000	$                  12,000	$      24,000	$         76,000
Watches	$         60,000	$                  18,000	$      36,000	$      114,000