Question

DAB Company has identified the following overhead activities, costs, and activity drivers for the coming year:

Activity                                Expected Cost          Activity Driver               Activity Capacity

Material-handling costs.. £45,000             Number of moves.........        450

Machine costs................ £80,000             Machine hours.............. 20,000

Order costs.................... £15,000             Number of orders.........        750

Receiving costs.............. £30,000             Number of parts........... 50,000

Setup costs.................... £50,000             Number of setups.........        250

Assume that each activity corresponds to a process. DAB’s normal activity is 5,000 direct labor hours. The following two jobs were completed during March:

                                                                   Job X-1           Job Y-4

Direct materials.......................... £1,500        £2,000

Direct labor (£15 per hour).........      £750           £750

Units completed..........................        200             200

Number of moves........................            3                 6

Machine hours............................        125               75

Number of orders........................            3               12

Number of parts..........................        200             800

Number of setups.......................            1                 4

Required:

Determine the unit cost for each job using direct labor hours to apply overhead.

Determine the unit cost for each job using the activity drivers to apply overhead.

Which method produces the more accurate cost assignment? Why?

                                    (8 Marks)

Answer 1

Using direcr labor hours

  Job X-1           Job Y-4

Direct Materials 1500 2000

Direct Labor 750 750

Overhead cost= 44*50=2200 2200

(Total Overhead cost/ Total labor hours)*labour hours used

Total cost= 4450 4950

Unit cost= 4450/200=22.25 4950/200= 24.75

b- According to activity driver

  

	Job X-1	Job Y-4
Direct Materials	1500	2000
Direct Labors	750	750
Material Handing Cost 45000/450= 100	100*3= 300	100*6= 600
Machine Costs 80,000/20,000= 4	4*125= 500	4*75= 150
Orders Cost 150,000/750= 200	200*3= 600	200*12= 2400
Receiving Cost 30,000/50,000=0.6	0.6*200=120	0.6*800=480
Setup Cost 50,000/250=200	200*1= 200	200*4= 800
Total cost	3970	7180
Units produced	200	200
Unit cost	3970/200=19.85	7180/200=35.9

Second method i.e.unit cost for each job using the activity drivers to apply overhead provide accurate cost assignment because in this method cost is assigned as per use not in generalized.