Question

This exercise will deal with the costing of a product using a predetermined overhead rate and Activity Based Costing (ABC). Please note the different results from using the different methods.

The Sample Company wants to compare the results from the use of a predetermined overhead rate versus Activity Based Costing (ABC). The following are the estimated costs:

Estimated Manufacturing Overhead					$ 1,000,000.00
Estimated direct labor hours (DLH)					40000
Predetermined Overhead Rate					$ 25.00	per DLH
				Mono-Relay		Bi-Relay
Time to Make One Unit				0.75		1	Hours
Estimated Units Produced				40000		10000
Estimated Total DLH				30000		10000
Direct Materials				$ 35.00		$   48.00
Direct Labor       $12 per hour				$ 9.00		$   12.00

				Estimated Overhead	Expected Activity
Maintaining Parts Inventory				$     180,000.00	225
Processing Purchase Orders				$   90,000.00	1000
Quality Control				$ 230,000.00	5750
Machine related				$ 500,000.00	10000
				$ 1,000,000.00
				Mono-Relay	Bi-Relay	Total
Maintaining Parts Inventory				75	150	225
Processing Purchase Orders				800	200	1000
Quality Control				2500	3250	5750
Machine related				4000	6000	10000

Compute the direct material, direct labor, overhead and total unit cost using the following:

Predetermined overhead rate

Activity Based Costing (ABC)

Please use the following Excel template:

Here is the link to the Template I couldn't upload the image here

<a href="http://tinypic.com?ref=5mww0x" target="_blank"><img src="http://i67.tinypic.com/5mww0x.png" border="0" alt="Image and video hosting by TinyPic"></a>

http://tinypic.com/r/5mww0x/9

Answer 1

• All working forms part of the answer
• Predetermined Overhead rate

Estimated Manufacturing Overhead	$1000000
Estimated direct labor hours (DLH)	40000
Predetermined Overhead Rate	$25 per DLH
	Mono-Relay	Bi-Relay
Time to Make One Unit	0.75	1
Estimated Units Produced	40000	10000
Estimated Total DLH	30000	10000
	Mono-Relay	Bi-Relay
Direct Materials	$35	$48
Direct Labor       $12 per hour	$9	$12
Manufacturing Overhead	[0.75 x $25] $18.75	[1 x $25] $25
Total Unit Cost	$62.75	$85

• ABC Method

	Estimated Overhead	Expected Activity	Rate
Maintaining Parts Inventory	$180000	225	$800	per part type
Processing Purchase Orders	$90000	1000	$90	per purchase order
Quality Control	$230000	5750	$40	per test
Machine related	$500000	10000	$50	per machine hours
Total Overhead	$1000000
	Mono-Relay	Bi-Relay	Total
Maintaining Parts Inventory	75	150	225
Processing Purchase Orders	800	200	1000
Quality Control	2500	3250	5750
Machine related	4000	6000	10000

Cost Allocation on the basis of Above Rates

		Mono-Relay		Bi-Relay
	Activity Rate	No. of activity	Cost Allocated	No. of activity	Cost Allocated
Maintaining Parts Inventory	$800	75	$60000	150	$120000
Processing Purchase Orders	$90	800	$72000	200	$18000
Quality Control	$40	2500	$100000	3250	$130000
Machine related	$50	4000	$200000	6000	$300000
Total			$432000		$568000

Overhead cost per unit

	Mono-Relay	Bi-Relay
Overhead cost allocated	432000	568000
Units	40000	10000
Overhead per unit	$10.8	$56.8

Cost per unit

	Mono-Relay	Bi-Relay
Direct Materials	$35	$48
Direct Labor       $12 per hour	$9	$12
Manufacturing Overhead [allocated as per ABC]	$10.8	$56.8
Total Unit Cost	$54.8	$116.8