Question

Q1) Luxury Furniture designs and builds factory-made, premium, wood armoires for homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2017 are as follows.

Overhead Cost Pools Amont ($)

Purchasing 47,000

Handling materials 50,000

Production (cutting, milling, finishing) 136,000

Setting up machines 85,000
Inspecting 60,000
Inventory control (RM and FG) 84,000

Utilities 100,000

For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2017, materials cost of $570,000 were budgeted. Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant, Bob Borke, to implement the activity-based costing system that he has repeatedly proposed. At Jim Brigham’s request, Bob and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Overhead Cost Pools   Activity Cost Drivers Expected Use of Cost Drivers

Purchasing Number of orders 500   
Handling materials Number of moves 5,700
Production (cutting, milling, finishing)   Direct labor hours 65,000
Setting up machines   Number of setups 1,600
Inspecting   Number of inspections   4,800
Inventory control (RM and FG)   Number of components   40,000

Utilities Square feet occupied 54,000

Debbie Steiner, sales manager, has received an order for 16 luxury armoires from Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 16 armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates the following data for the production of 16 armoires.

DM Cost ($) 5,800
DL Cost ($) 3,400
DL Hours 200

Number of Purchase Orders 3

Number of Materials Moves 32

Number of Machine Setups    4

Number of Inspections 20

Number of Components 640

Number of Square Feet Occupied 320

a) What is the unit manufacturing cost per armoire under traditional costing?
b) What is the unit manufacturing cost per armoire under the proposed activity-based costing?

  

Answer 1

Part 1
	Total Overhead Costs =$562,000
	Overhead Cost per direct material costs =$562,000 / $570,000 =0.985965 per $ direct material cost
	Total Overhead Costs allocated =$5,800*$0.985965 =$5,718
	Calculation of Product cost per armories
	Direct materials per armories($5,800/16)	$                     362.50
	Direct labor cost per armories($3,400/16)	$                     212.50
	Overhead Cost per armories($5,718/16)	$                     357.38
	Product cost per armories	$                     932.38
Part 2
	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Purchasing	$                     47,000	500	$                                  94.00	per order
	Handling materials	$                     50,000	5,700	$                                    8.77	per move
	Production	$                  1,36,000	65,000	$                                    2.09	per direct labor hours
	Setting up machines	$                     85,000	1,600	$                                  53.13	per setups
	Inspecting	$                     60,000	4,800	$                                  12.50	per inspection
	Inventory Control	$                     84,000	40,000	$                                    2.10	per component
	Utilities	$                  1,00,000	54,000	$                                    1.85	per square feet
	Total Cost	$                  5,62,000
		Activity Based usage	Activity Based usage*ABC rate
	Purchasing	3	$                                    282.00
	Handling materials	32	$                                    280.70
	Production	200	$                                    418.46
	Setting up machines	4	$                                    212.50
	Inspecting	20	$                                    250.00
	Inventory Control	640	$                                 1,344.00
	Utilities	320	$                                    592.59
	Total Overhead Cost allocated		$                                 3,380.26
	Production		16
	Overhead Cost per armories		$                                    211.27
	Calculation of Product cost per armories
	Direct materials per armories($5,800/16)	$                     362.50
	Direct labor cost per armories($3,400/16)	$                     212.50
	Overhead Cost per armories	$                     211.27
	Product cost per armories	$                     786.27