Question

The job-costing system at Melody’s Custom Framing has five indirect cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs: Job 220, an order of 17 intricate personalized frames, and Job 330, an order of 5 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job-costing system and a newly designed activity-based job-costing system. Total budgeted costs in each indirect-cost pool and the budgeted quantity of activity driver are as follows.

Purchasing Material handling

Machine maintenance Product inspection

Packaging

Budgeted Overhead $ 28,500 47,700

100,000 6,800

13,200 $196,200

Information related to Job 220 and Job 330 follows. Job 220 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 330.

Number of purchase orders Number of material moves

Machine-hours

Number of inspections Units produced

Job 220 21 18 30 10 17

Job 330 9 6

70 2 5

1. Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours.

2. Compute the total overhead allocated to each job under an activity-based costing system using the appropriate activity drivers.

3. Explain why Melody’s Custom Framing might favor the ABC job-costing system over the simple job-costing system, especially in its bidding process.

Answer 1

Answers:

1.)

OH allocated    = Total OH Budget ÷ Machine Hours

Job 220	Job 330
Cost per machine hour	Machine Hours	Total OH allocated	Cost per machine hour	Machine Hours	Total OH allocated
$19.62	30	$588.60	$19.62	70	$1,373.40

.

2.)

Activity-based Costing
	OH	Driver	Rate	Job 220	Job 330
Purchasing	$28,500	1500	19	$19 * 21 = $399	$19 * 9 = $171
Material handling	47,700	5300	9	$ 9 * 18 = $162	$ 9 * 6 = $ 54
Machine Maintenance	100,000	10,000	10	$10 * 30 = $300	$10*70 = $ 700
Production inspection	6800	1700	4	$ 4 * 10 = $ 40	$ 4 * 2 = $   8
Packaging	13,200	3300	4	$ 4 * 17 = $ 68	$ 4 * 5 = $ 20
Total	$196,200			$969	$953

.

3.)

Because it is more accurate in determining precise rates for each Job(s) OH & Driver costs. Simple costing is used for totaling overall costs while activity-based computes each OH & Driver cost per machine hour times each of the five indirect cost pools to get its total.

Job 220 appears to show that machine hours are understated in the simple method, but not the case in activity-based costing where it shows more definite costs.

Job 330 appears to show more total OH allocated using the simple method, but in the activity-based costing, it shows a 69% overall decrease in total OH costs in the five indirect cost pools.