Question

4) A company manufactures household items sold at trade shows. The items, classified as either Trinkets or Widgets are manufactured on a common assembly line. Although different direct materials are used, the direct labour cost is the same for each product line.

The plant-wide rate for allocating manufacturing overhead to its products is no longer acceptable. The production manager has heard about activity-based costing and has assembled some information for use in changing the cost system to a cost driver concept.

With the help of the accounting department, the manager has been able to establish the following relationships between production costs and some of the indirect manufacturing activities for August, along with the production data for the two product lines:

Activity

Material handling Machining Assembly Inspection

Direct costs:

Labour Materials

Cost Driver

Number of parts Machine hours Units began Number tested

Allocation Rate

$1.00 per part $15.00 per hour

$1.60 per unit $2.00 per unit

Trinkets

$12,000 $5,200

Trinkets

2,000 205 1,000 100

Widgets

$12,000 $2,600

Widgets

1,300 300 1,300 1,200

Required:

Using activity-based costing determine the total production cost of each of the two product lines for August and the cost per unit assuming all units started were completed.

Answer 1

Answer:

Activity	Cost Allocation Rate	Quantity of Cost Allocation Base Used By:	Allocation Activity Cost Per Wheel
		Trinkets	Widgets	Trinkets	Widgets
Material handling	$            1.00	2000	1300	$           2,000	$           1,300
Machining	$         15.00	205	300	3,075	4,500
Assembly	$            1.60	1000	1300	1,600	2,080
Inspection	$            2.00	100	1200	200	2,400
Total indirect cost	6,875	10,280
Total direct cost*	17,200	14,600
Total manufacturing cost	$         24,075	$         24,880
Total number of units	1,000	1,300
Unit manufacturing costs	$           24.08	$           19.14

*

	Trinkets	Widgets
Direct manufacturing costs:
Direct labour	$       12,000	$         12,000
Direct material	5,200	2,600
Total direct costs	17,200	14,600