Question

Daisy Wheel, Inc.
Automobile Steering Wheels
Daisy Wheel produces 2 lines of steering wheels at its plant in Taft, Louisiana - 12-in. wheels for cars and 14-in. wheels for trucks.
A significant portion of overhead costs come from the Packing, Shipping and Inspection departments. These departments are housed in the same plant. Both product lines also share engineering and support activities
The following are the cost analyses for the month of October 2017
Activity		TOTAL COST		ACTIVITY COST	ACTIVITY	ACTIVITY
Department Overhead costs				DRIVER	QTY	UNIT RATE
Packing		$ 40,000		Units produced	4000	$ 10
Shipping		$ 50,000		Number of batches	40	$ 1,250
Inspection & QC		$ 120,000		Number of machine set-ups	20	$ 6,000
Shared Support
Engineering		$ 32,000		Machine Hours	800	$ 40
Purchasing and Receiving		$ 12,000		Purchase Orders	30	$ 400
Plant Maintenance		$ 12,000		Machine Hours	800	$ 15
	Total	$ 266,000
The following table shows units and resource consumption of the two lines in that month (Oct 2017)
		Car St. Wheels	Truck St. Wheels	Total
Units Produced		2000	2000	4000
Number of batches		10	30	40
Machine Hours		300	500	800
Machine set-ups		5	15	20
Purchase Orders		10	20	30
1. If Daisy Wheel used a simple Plant Overhead rate per unit produced without differentiating activites, what would be the total plant overhead cost per unit for these six departments
2. Use Activity Based Cost Analysis to refine the Plant Overhead cost per unit, for the given activities, of Car Steering Wheels and Truck Steering Wheels
3. Briefly discuss your results, simply stating why the results using ABC differed widely from those using flat rates per produced unit

Answer 1

Answer 1:

Overhead Cost based on Plant Overhead Rate:

Activity	Cost	Total Units Produced	Overhead Rate per unit
Packing	40,000	4,000	10.00
Shipping	50,000	4,000	12.50
Shared Support	1,20,000	4,000	30.00
Engineering	32,000	4,000	8.00
Purchasing and Receiving	12,000	4,000	3.00
Plant Maintenance	12,000	4,000	3.00
Total overhead rate per unit of each product			66.50

Answer 2

Overhead Rate Based on Activity Based Costing:

Activity	Cost	Activity Driver	Qty of Activity Driver	Rate per activity driver	Car Wheel Activity Driver	Truck Wheel Activity Driver	Car Wheel Overhead Cost	Truck Wheel Overhead Cost
Packing	40,000	Units produced	4,000	10	2,000	2,000	20,000	20,000
Shipping	50,000	Number of batches	40	1,250	10	30	12,500	37,500
Shared Support	1,20,000	Number of machine set-ups	20	6,000	5	15	30,000	90,000
Engineering	32,000	Machine Hours	800	40	300	500	12,000	20,000
Purchasing and Receiving	12,000	Purchase Orders	30	400	10	20	4,000	8,000
Plant Maintenance	12,000	Machine Hours	800	15	300	500	4,500	7,500
Total	2,66,000	Total					83,000	1,83,000

	Car Wheel	Truck Wheel
Total Overhead Cost assigned	83,000.00	1,83,000.00
No. of units produced	2,000.00	2,000.00
Overhead Rate per unit	41.50	91.50

Answer 3

Activity based costing takes into account the number of activity driver used for each identifiable activity cost. While the Plant Overhead Rate ignores these things and simply allocated overhead cost based on number of units produced.

In our case, since truck wheels used more acitivity drivers as compared to car wheels, overhead rate of truck wheels is more in case of activity based costing.