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 1,800 parts 1,250 parts Machining Machine-hours $ 12.00 per machine-hour 185 machine-hours 270 machine-hours Assembly Units produced $ 1.80 per unit 900 units 1,250 units Quality control Units tested $ 3.00 per unit 90 units 1,150 units Direct materials $ 4,500 $ 2,500 Direct labour $ 10,800 $ 10,800 Each product consumed 540 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

ABC costing uses different cost drivers for allocating OH costs to its products.

	Desks	cabinets
Parts receipts	$3,600[$2*1800]	$2500[$2*1,250]
Machining	$2,220[$12*185]	$3,240[$12*270]
Assembly	$1,620[$1.80*900]	$2,250[$1.80*1,250]
Quality control	$270[$3*90]	$3,450[$3*1,150]
Total OH costs	$7,710[$3600+2220+1620+270]	$11,440[$2500+3240+2250+3450]

Total manufacturing costs = Labor+Material+Overhead costs

	Desks	Cabinets
Total Manufacturing costs	$23,010[$4500+10800+$7,710]	$24,740[$11,440+$2,500+$10,800]
Per unit	$25.57[$23,010/900 units produces]	$19.79[$24,740/1,250 units produced]

2) single OH rate based on direct labor hours

= Total cost/ number labor hours

=[$7,710+$11,440]/(540+540)

=$19,150/1,080

=$17.73 per direct labor hour

	Desks	Cabinets
Total Manufacturing costs	$24,874.2[$4500+10800+($17.73*540)]	$22,874.2[$2,500+10,800+($17.73*540)]
Per unit	$27.64[$24,874.2/900 units produces]	$18.30[$22,874.2/1,250]

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