Question

Activity Base Costing (ABC)

Mango Mancam has two produce lines for it well marketed Milk Shake drink: Regular and Deluxe size. The company assigns $340,000.00 in manufacturing overhead costs to three departments; Purchasing, Mixing and Packing.

Additional information about each product line is shown below;

	Regular	Deluxe
Number of units Produced per month	220,000	150,000
Number of Units Sold per month	210,000	140,000
Direct Material cost per unit	1.10	1.15
Machine hour per Unit	0.50	0.40
Direct Labor Cost per hour	.40	.30
Direct Labor hours per unit	0.15	0.30

The following cost pool and cost driver was used

Cost Pool	Amount Allocated	Cost Driver	Total Drive Volume
Purchasing Department	120,000	Purchase Order	30,000
Mixing Department	180,000	Machine hours	170,000MH
Packing Department	40,000	Direct Labor hours	4,000 DLH
Total Allocation	340,000

The amount of driver activity corresponding to each product line is as follow

(a) Allocate manufacturing overhead costs to each product line using machine hours as a single cost driver.

(b) Allocate manufacturing overhead costs to each product line using the ABC approach.

(c) Compute the total manufacturing costs assigned to each product line when using ABC and traditional method.

(d) As a manager advice the CEO of the company what is the most cost effective method for the company. Give some key example. (Hint: keep your answer short, sweet and simple)

Answer 1