Question

Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows:

Activities                                         Cost driver             Allocation Rate

Material handling                    Number of parts                    $2 per part

Assembly                                       Labor hours                 $20 per hour

Inspection                   Time at inspection station               $3 per minute

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $200 per labor hour.

1) Nichols' management is considering to implement ABC system because ________.

2) What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 50 remote controls are produced? The batch requires 100 parts, 6 direct manufacturing labor hours, and 2.5 minutes of inspection time.

3) What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 450 parts, 8 direct manufacturing labor hours, and 10 minutes of inspection time.

Answer 1

1.)

Nichols' management is considering to implement ABC system because ABC system is a highly refined costing system. ABC system brings accuracy and reliability in product cost determination. it identifies the real nature of cost behaviour and helps in reducing costs and identifying activities which do not add value to the product. It traces costs to areas of managerial responsibility, processes, customers, departments besides the product costs.

2.)

$6.55 per remote control

Explanation:

Cost of a batch = (Number of parts × Allocation rate per part +  Labor hours × Allocation rate per hour +  Time at inspection station × Allocation rate per minute)

Cost of a batch = (100 × $2) + (6 × $20) + (2.5 × $3) = $327.5 per batch

Cost per unit = Cost per batch / units per batch

Cost per unit = $327.5 / 50

Cost per unit = $6.55 per remote control

3.)

$10.90 per remote control

Explanation:

Cost of a batch = (Number of parts × Allocation rate per part +  Labor hours × Allocation rate per hour +  Time at inspection station × Allocation rate per minute)

Cost of a batch = (450 × $2) + (8 × $20) + (10 × $3) = $1,090 per batch

Cost per unit = Cost per batch / units per batch

Cost per unit = $1,090 / 100

Cost per unit = $10.90 per remote control