In: Accounting
Groleau Corporation has an activity-based costing system with three activity cost pools--Processing, Setting Up, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products and the company's costs and activity-based costing system appear below:
Factory utilities (total) | $ | 35,500 | |||||
Indirect labor (total) | $ | 15,200 | |||||
Distribution of Resource Consumption Across Activity Cost Pools
Processing | Setting Up | Other | |
Factory utilities | 0.40 | 0.10 | 0.50 |
Indirect labor | 0.40 | 0.40 | 0.20 |
MHs | Batches | |
Product S8 | 3,000 | 1,100 |
Product F1 | 7,700 | 1,000 |
Total | 10,700 | 2,100 |
Product S8 | Product F1 | ||||||
Sales (total) | $ | 70,300 | $ | 98,800 | |||
Direct materials (total) | $ | 23,700 | $ | 34,800 | |||
Direct labor (total) | $ | 34,100 | $ | 43,300 | |||
Required:
a. Assign overhead costs to activity cost pools using activity-based costing.
b. Calculate activity rates for each activity cost pool using activity-based costing.
c. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.
d. Determine the product margins for each product using activity-based costing.
Answer:
(a) Overhead costs to activity cost pools
Total Processing costs = [(Factory Utilities overheads * 0.4) + (Indirect Labor Overheads * 0.4)]
= [($35,500 * 0.4) + ($15,200 * 0.4)]
= $14,200 + $6,080
= $20,280
Total Setting Up costs = [(Factory Utilities overheads * 0.1) + (Indirect Labor Overheads * 0.4)]
= [($35,500 * 0.) + ($15,200 * 0.4)]
= $3,550 + $6,080
= $9,630
(b) Activity rates for each activity cost pool
Processing costs rate = Total Processing costs / Total Machine hours = $20,280 / 10,700 = $1.895 per machine hour
Setting Up costs rate = Total Setting up costs / Total Batches = $9,630 / 2,100 = $4.585 per batch
(c) Amount of overhead cost that would be assigned to each product using ABC
Processing costs allocated to Product S8
= Total no. of machine hours * Processing costs rate per machine hour = 3,000 * 1.895 = $5,686
Setting up costs allocated to Product S8
= Total no. of batches * Setting Up costs rate per batch = 1,100 * 4.585 = $5,044
Total Overhead costs allocated to Product S8 = $5,686 + $5,044 = $10.730
Processing costs allocated to Product F1
= Total no. of machine hours * Processing costs rate per machine hour = 7,700 * 1.895 = $14,594
Setting up costs allocated to Product F1
= Total no. of batches * Setting Up costs rate per batch = 1,000 * 4.585 = $4,586
Total Overhead costs allocated to Product F1 = $14,594 + $4,586 = $19,180
(d) Product margins for each product using activity-based costing
Product S8 | Product F1 | ||||
A | Sales | $70,300 | $98,800 | ||
Costs: | |||||
Direct Materials | 23,700 | 34,800 | |||
Direct Labor | 34,100 | 43,300 | |||
Processing costs allocated | 5,686 | 14,594 | |||
Setting up costs allocated | 5,044 | 4,586 | |||
B | Total Cost | 68,530 | 97,280 | ||
Product Margin (A-B) | 1,770 | 1,520 |