Question

Green Furniture (GF) manufactures a variety of furniture for household use and just two items for office use: desks and cabinets. The production process for desks and cabinets is similar, although machines must be retooled for each product. Both materials and labour costs are directly traceable to individual products; however, overhead is a common cost and allocated using direct labour-hours as the allocation base. GF’s accountant is considering the use of activity-based costing (ABC) and has suggested evaluating the system by applying it to the two office use products (desks and cabinets). The following data are available for a typical quarter.

Activity Cost Pool	Activity Base	Activity Rate			Activity Usage
					Desks			Cabinets
Parts receipts	Number of parts	$	2.00	per part		1,000	parts		650	parts
Machining	Machine-hours	$	10.00	per machine-hour		100	machine-hours		150	machine-hours
Assembly	Units produced	$	1.20	per unit		500	units		650	units
Quality control	Units tested	$	3.00	per unit		50	units		550	units
Direct materials					$	2,500		$	1,300
Direct labour					$	6,000		$	6,000

Each product consumed 300 direct labour-hours.

Required:

1. Determine the total manufacturing cost and cost per unit for each of the two product lines for the quarter, using activity-based costing to allocate overhead costs. (Round "Cost per unit" answers to 2 decimal places.)

2. Redo the above using direct labour-hours as the allocation base. (Round "Cost per unit" answers to 2 decimal places.)

Answer 1

Requirement 1:

	Desks	Cabinets
Total manufacturing cost	$12,250	$12,530
Cost per unit	$24.50	$19.28

Working notes:

a. Allocation of overhead cost

Desks

Activity	Cost Driver	x	Activity rate	=	Overhead cost
Parts receipts	1,000 parts	x	$2.00	=	$2,000
Machining	100 machine hours	x	$10.00	=	$1,000
Assembly	500 Units	x	$1.20	=	$600
Quality control	50 units	x	$3.00	=	$150
Overhead cost				=	$3,750

Cabinets

Activity	Cost Driver	x	Activity rate	=	Overhead cost
Parts receipts	650 parts	x	$2.00	=	$1,300
Machining	150 machine hours	x	$10.00	=	$1,500
Assembly	650 Units	x	$1.20	=	$780
Quality control	550 units	x	$3.00	=	$1,650
Overhead cost				=	$5,230

b. Manufacturing cost and cost per unit

Particulars	Desks	Cabinets
Direct Materials	$2,500	$1,300
Direct Labour	$6,000	$6,000
Overhead cost	$3,750	$5,230
Total Manufacturing costs	$12,250	$12,530
/ Number of units	500	650
Cost per unit	$24.50	$19.28

Requirement 2:

	Desks	Cabinets
Total manufacturing cost	$12,990	$11,790
Cost per unit	$25.98	$18.14

Working notes:

a. Total Overhead cost:

= (1,000 + 650) * $2.00 + (100 + 150) * $10.00 + (500 + 650) * $1.20 + (50 + 550) * $3.00

= $3,300 + $2,500 + $1,380 + $1,800

= $8,980

b. Total direct labour hours:

= 300 + 300

= 600 direct labour hours

c. Predetermined overhead rates

Predetermined overhead rates = Total Overhead costs / Total Direct labour hours

Predetermined overhead rates = $8,980 / 600 direct labour hours = $14.97 per direct labour hours

d. Allocation of overhead cost

Desk = 300 direct labour hours * $14.97 per direct labour hour = $4,490

Cabinet = 300 direct labour hours * $14.97 per direct labour hour = $4,490

e. Manufacturing cost and cost per unit

Particulars	Desks	Cabinets
Direct Materials	$2,500	$1,300
Direct Labour	$6,000	$6,000
Overhead cost	$4,490	$4,490
Total Manufacturing costs	$12,990	$11,790
/ Number of units	500	650
Cost per unit	$25.98	$18.14

All the best...