In: Accounting
The Cowie Corporation has a machining facility specializing in jobs for the space-shuttle components market. The prior job costing system had two direct cost categories (direct materials and direct manufacturing labor) and a single indirect cost pool (manufacturing overhead, allocated using direct labor-hours). The indirect cost allocation rate of the prior system for 2020 would have been $120 per direct manufacturing labor-hour.
Recently, a team with members from product design, manufacturing, and accounting used an activity-based approach to refine its job costing system. The two direct cost categories were retained. The team decided to replace the single indirect cost pool with five indirect cost pools. These five cost pools represent five activity areas at the facility, each with its own supervisor and budget responsibility. Pertinent data are as follows:
Activity Area | Cost driver used as allocation base | Cost |
Materials-handling | Components | $100,000 |
Lathe work | Turns | $ 40,000 |
Welding | Machine-Hours | $200,000 |
Grinding | Bits | $ 80,000 |
Testing | Units tested | $ 30,000 |
During the year Cowie expects to handle 250,000 components, perform 100,000 turns, use 10,000 Machine-hours, grind 100,000 bits and do 2,000 tests on units.
Information-gathering technology has advanced to the point where all the data necessary for budgeting in these five activity areas are automatically collected.
Two representative jobs processed under the new system at the facility in the most recent period had the following characteristics:
Job 410 | Job 411 | |||
Direct materials cost per job | $ 9,700 | $69,900 | ||
Direct manufacturing labor cost per job | $ 750 | $11,250 | ||
Direct manufacturing labor-hours per job | 30 | 375 | ||
Components per job | 500 | 2,000 | ||
Turns per job | 20,000 | 59,000 | ||
Machine-hours per job | 150 | 1,000 | ||
Bits per job | 500 | 2,000 | ||
Units per job | 10 | 300 | ||
All units are tested on both jobs |