Question

Activity-Based Costing and Conventional Costs Compared Chef Grill Company manufactures two types of cooking grills: the Gas Cooker and the Charcoal Smoker. The Cooker is a premium product sold in upscale outdoor shops; the Smoker is sold in major discount stores. Following is information pertaining to the manufacturing costs for the current month. Gas Cooker Charcoal Smoker Units 1,000 7,000 Number of batches 40 10 Number of batch moves 80 20 Direct materials $50,000 $100,000 Direct labor $20,000 $28,000 Manufacturing overhead follows: Activity Cost Cost Driver Materials acquisition and inspection $360,000 Amount of direct materials cost Materials movement 16,600 Number of batch moves Scheduling 30,000 Number of batches $406,600 Rounding instructions: Do not round until your final answers. Round total cost answers to the nearest dollar and per unit answers to the nearest cent. (a) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming all manufacturing overhead is assigned on the basis of direct labor dollars. HINT: Use 8.4708 for overhead rate calculations. Total cost $ Answer Gas Cooker $ Answer per unit Charcoal Smoker $ Answer per unit (b) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming manufacturing overhead is assigned using activity-based costing. Total cost $ Answer Gas Cooker $ Answer per unit Charcoal Smoker $ Answer per unit

Answer 1

Solution

Chef Grill Company

1. Determination of total and per unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month

	Gas Cooker	Charcoal Smoker
Direct materials	$50,000	$100,000
Direct labor	$20,000	$28,000
Manufacturing overhead at 8.4708	$169,416	$237,184
Total cost	$239,416	$365,184
Number of units	1,000	7,000
cost per unit	$239.42	$52.17

Notes –

1. Manufacturing overhead is calculated based on direct labor cost,

Gas Cooker = $20,000 x 8.408 = $169,416

Charcoal Smoker = $28,000 x 8.408 = $237,184

1. Cost per unit = total cost/number of units

1. Determination of total and per unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month using Activity based Costing:

	Gas Cooker	Charcoal Smoker
Direct materials	$50,000	$100,000
Direct labor	$20,000	$28,000
Manufacturing overhead	$157,280	$249,320
Total cost	$227,280	$377,320
Number of units	1,000	7,000
cost per unit	$227.28	$53.91

Notes –

1. Manufacturing overhead = total overhead assigned to each product as shown in below calculations.
2. Number of units are given in Q., hence cost per unit = total cost /number of units

Computations –

Computation of activity rate –

Activity	Cost	Cost Driver	Activity Rate
Materials Acquisition and Inspection	$360,000	$150,000 Direct material cost	2.4
Material Movement	$16,600	100 batches	$166
Scheduling	$30,000	50 batches	$600 per batch

Note – Activity rate = cost/cost driver usage

Computation of total and per unit overhead cost:

• Gas Cooker

Gas Cooker
Activity	Cost Driver	Usage	Activity rate	Overhead assigned
Materials acquisition and inspection	direct material cost	$50,000	$2.40	$120,000
Materials movement	number of moves	80	$166	$13,280
Scheduling	Batches	40	$600	$24,000
Total overhead assigned				$157,280
Number of units				1,000
Cost per unit				$157.28

Charcoal smoker
Activity	Cost Driver	Usage	Activity rate	Overhead assigned
Materials acquisition and inspection	direct material cost	$100,000	$2.40	$240,000
Materials movement	batches	20	$166	$3,320
Scheduling	number of moves	10	$600	$6,000
Total overhead assigned				$249,320
Number of units				7,000
Cost per unit				$35.62

Note – Overhead assigned = activity rate x usage