Question

Sand Castle Manufacturing produces concrete yard art. Recently, 2,500 concrete seahorses were produced in a production run. The run required 1,250 machine hours, and also required five "set-ups" of mixing equipment. Final inspection required 50 hours of inspection activity. Overhead is estimated at $30 per machine hour, plus $2,750 per "set-up," and $25 per inspection hour. Direct materials and direct labor total $75 per seahorse.

(a) Apply activity-based costing and determine the amount assigned to a concrete seahorse.

(b) For GAAP purposes, Sand Castle applies traditional costing methods, and allocates overhead at $50 per machine hour. How much cost would be assigned to the 2,500 seahorses? What is the per unit cost of a seahorse under the traditional approach? What might explain the higher cost assignment, and how could this influence business decision making?

Answer 1

a)   Calculation of amount assigned to a 2500 concrete seahorse

                                                                                                            $

Direct material and labour cost (2500X75)     =                     187500

Overhead cost

Machine (30X1250) =   37500

set-up (5X2750)    = 13750

Inspection(50X25)    = 1250                            =                      52500   

Total cost                                                                                        240000

Total cost assigned as per activity cost method = $240000

b) Calculation of total cost assigned as per traditional cost method, using overhead rate $50 per machine hour ..

                                                                                            $                  

Direct Material and direct labour cost            =        187500

Overhead cost (1250X50)    = 62500

Total cost = 250000

Cost would be assigned to the 2500 seahourse under traditional costing method is = $250000

Per unt cost of a seahorse under the tradtional approach = 250000/2500 = $100 per unit

Under the Traditional costing method the allocated cost is higher as compair of activity costing method...

and this always influence business decision making because under the traditional costing method profit is less as compair of activity based costing.

under the activity based costing : the cost we are allocating as per the how much resourced of the company used by the particular activity or assignment that will actual cost of the assignment

Traditional costing method: The overhead is allocated as per the base overhead rate of the company in this method resource or activity used the assignment will not consider