Question

The Pinewood Furniture Company Pty Ltd plans to manufacture two lines of chairs in the coming year - lounge and patio. The company is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver.

Activity	Cost	Activity Driver
Material Setups	300,000	Number of setups
Material handling	250,000	Number of parts
Cutting	700,000	Number of parts
Assembly	600,000	Direct labour hours
Finishing	450,000	Number of units

The level of activity for the year is:

	Lounge	Patio
Units to be produced	10,000	5,000
Number of Setups	60	60
Number of parts per unit	10	5
Direct Labour Hours per unit	5	2

Under an activity-based costing system, what is the total cost allocated to lounge chairs for the year?

Select one:

a. $1,710,000

b. $ 590,000

c. $1,410,000

d. $ 890,000

e. $1,150,000

Answer 1

Working Notes: 1
	Calculation of the Cost Driver Rate
	Cost Driver Rate = Activity Cost / Cost Driver
			Activity Cost / Cost Driver =
	Activity	Cost Driver	Activity Cost	"/"	Cost Driver	" = " To	Cost Driver Rate
	Material Setups	No. of Set-ups	$                      300,000	"/"	120	" = " To	$              2,500.00
	Material Handling	No. of Parts	$                      250,000	"/"	125,000	" = " To	$                      2.00
	Cutting	No. of Parts	$                      700,000	"/"	125,000	" = " To	$                      5.60
	Assembly	Direct Labor Hours	$                      600,000	"/"	60,000	" = " To	$                    10.00
	Finishing	No. of Units	$                      450,000	"/"	15,000	" = " To	$                    30.00
		Total	$                   2,300,000
Solution:
	Calculation of the total cost allocated to lounge chairs of the year
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Overhead Cost:
	Material Setups	60	"X " By	$         2,500.00	$                 150,000
	Material Handling	100,000	"X " By	$                  2.00	$                 200,000
	Cutting	100,000	"X " By	$                  5.60	$                 560,000
	Assembly	50,000	"X " By	$               10.00	$                 500,000
	Finishing	10,000	"X " By	$               30.00	$                 300,000
		Total Cost			$             1,710,000
Answer = Option A = $ 1,710,000