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)	40,000
Predetermined overhead rate (per DLH)	$25.00
	Mono-Relay		Bi-Relay
Time to make one unit (hours)	0.75		1
Estimated units produced	40,000		10,000
Estimated total DLH	30,000		10,000
Direct materials cost per unit	$35.00		$48.00
Direct labor cost per unit (at $12 per DLH)	$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		10,000
Total estimated overhead	$1,000,000.00
	Expected Activity Mono-relay		Expected Activity Bi-Relay		Total Activity
Maintaining parts inventory	75		150		225
Processing purchase orders	800		200		1,000
Quality control	2,500		3,250		5,750
Machine related	4,000		6,000		10,000

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

• Predetermined overhead rate
• Activity Based Costing (ABC)

Answer 1

Requirement 1
Unit cost using predetermined overhead rate
	Mono-Relay	Bi-Relay
Direct Material	35.00	48.00
Direct labor	9.00	12.00
Manufacturing overheads	18.75	25.00
	(0.75*25)	(1*25)
Unit product cost	62.75	85.00
Requirement 2
Unit cost using Activity based costing
Computation of activity rates
Activity cost pools	Estimated over head costs	Expected cost driver activity	Activity rate
Maintaining Parts Inventory	1,80,000	225	800.00
			(180,000/225)
Processing purchase orders	90,000	1,000	90.00
			90,000/1000
Quality control	2,30,000	5,750	40.00
			(230,000/5,750)
Machine -related	5,00,000	10,000	50.00
			(500,000/10,000)
* Activity rate = Activity cost / Cost driver activity
Requirement b
	Mono-Relay	Bi-Relay
Total direct Materials costs	1400000	480000
Total direct labor costs	360000	120000
Manufacturing overhead costs:
Maintaining Parts Inventory	60000	120000
	(75*800)	(150*800)
Processing purchase orders	72000	18000
	(800*90)	(200*90)
Quality control	100000	130000
	(2500*40)	(3250*40)
Machine -related	200000	300000
	(4000*50)	(6000*50)
Total Costs	2192000	1168000
Units produced	40000	10000
Unit Cost	54.80	116.80