In: Accounting
Franklin Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow:
Activities | ||||||||
Unit Level | Batch Level | Product Level | Facility Level | |||||
Cost | $ | 66,700 | $ | 23,970 | $ | 12,000 | $ | 288,000 |
Cost driver | 2,900 labor hrs. | 47 setups | Percentage of use | 18,000 units | ||||
Production of 900 sets of cutting shears, one of the company’s 20 products, took 180 labor hours and 7 setups and consumed 15 percent of the product-sustaining activities.
Required
A) Had the company used labor hours as a company wide allocation base, how much overhead would it have allocated to the cutting shears?
B) How much overhead is allocated to the cutting shears using activity-based costing?
C) Compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 900 units are produced. If direct product costs are $200 and the product is priced at 30 percent above cost for what price would the product sell under each allocation system?
Solution A:
Total estimated overhead = $66,700 + $23,970 + $12,000 + $288,000 = $390,670
Estimated direct labor hours = 2900 labor hours
Predetermined overhead rate = Estimated overhead / Estimated direct labor hours = $390,670 / 2900 = $134.7138 per labor hours
Overhead allocated to cutting shears = 180 * $134.7138 = $24,248
Solution B:
Computation of overhead assigned to product - Activity Based Costing | ||||||
Activity | Cost | Cost Driver | Qty of cost driver | Allocation rate | Cutting Shears | |
Allocation Qty | Allocated Overhead | |||||
Unit Level | $66,700.00 | Labor hours | 2900 | $23.00 | 180 | $4,140.00 |
Batch level | $23,970.00 | Setups | 47 | $510.00 | 7 | $3,570.00 |
Product level | $12,000.00 | Percentage of use | 100% | $12,000.00 | 15% | $1,800.00 |
Facility level | $288,000.00 | Nos of units | 18000 | $16.00 | 900 | $14,400.00 |
Total | $390,670.00 | $23,910.00 |
Solution c:
Overhead cost per unit - using ABC = $23,910 / 900 = $26.57 per unit
Overhead cost per unit - using direct labor hours for allocation = $24,248 / 900 = $26.94
Computation of Selling price of Cutting Shears | ||
Particulars | Traditional Costing | Activity Based Costing |
Direct product cost | $200.00 | $200.00 |
Overhead cost per unit | $26.94 | $26.57 |
Total cost per unit | $226.94 | $226.57 |
Markup (30% on cost) | $68.08 | $67.97 |
Selling price per unit | $295.02 | $294.54 |