Question

Woodland Industries manufactures and sells custom-made windows. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $19 per hour and that there were no beginning inventories. The following information was available for 2016, based on an expected production level of 53,800 units for the year, which will require 215,000 direct labor hours:

Activity Cost Driver	Budgeted Costs for 2016			Cost Driver Used as Allocation Base			Cost Allocation Rate
Materials handling	$	47,300			Number of parts used		$	0.22	per part
Cutting and lathe work		2,919,700			Number of parts used			13.58	per part
Assembly and inspection		3,397,000			Direct labor hours			15.80	per hour

The following production, costs, and activities occurred during the month of July:

Units Produced	Direct Materials Costs	Number of Parts Used	Direct Labor Hours
3,470	$117,200	-13	13,300

Required:

a. Calculate the total manufacturing costs and the cost per unit of the windows produced during the month of July (using the activity-based costing approach). (Round "Cost per unit produced" to 2 decimal places.)

b. Assume instead that Woodland Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity-based costing system previously described). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of July. (Hint: You will need to calculate the predetermined overhead application rate using the total budgeted overhead costs for 2016.) (Round "Cost per unit produced" to 2 decimal places.)

c. Which approach do you think provides better information for manufacturing managers?

	Activity based costing
	Direct labor hours basis

Answer 1

Assuming that the activities responsible for the production of coffee
tables have all been identified and that their cost allocation rates have
been accurately estimated, ABC should give a better idea than traditional
accounting methods of the month-to-month manufacturing costs of a given
product.

The trouble with traditional overhead allocation is that not only
might the output of a product fluctuate drastically, but the costs of
the activities may also change over the course of a year. Instead of
using an average activity cost or an annualized estimate, ABC lets us
compute the total production cost according to the current costs of
the activities that go into manufacturing a given product.