Question

Crawford Company is a family-run business that manufacturers steering wheels for self-driving cars. Crawford makes both a standard wheel which is similar to traditional car steering wheels and a deluxe model which is larger to allow a human driver to easily reach over and take control over the automated system. The company has been using a plant-wide overhead rate based on direct labor hours to allocate its overhead to each model. LeeAnn Lucky, the new controller, is convinced that an activity-based costing system will provide better information about the costs and profitability of each model which should lead to better decisions about whether the company should focus on one model or the other. She has pulled the following information about overhead costs from the past year and inserted activity-based costing (ABC) information:  

Activity	Allocation Base	Activity Cost Allocation Rate
Materials handling	Number of parts	$4.50 per part
Machine setup	Number of setups	$325.00 per setup
Inspection of parts	Number of parts	$31.00 per part
Finishing	Finishing direct labor hours	$51.00

	Standard	Deluxe
Parts per wheel	4.0	6.0
Setups per 1,000 wheels	20.0	20
Finishing direct labor hours per wheel	1.0	3.0
Total direct labor hours per wheel	2.7	3.8

The company's managers expect to produce 1,000 units of each model during the upcoming year. Answer the following questions. Each question is worth 1 point.

1. Compute the total budgeted manufacturing overhead cost for the upcoming year using ABC costing information.

2. Compute the manufacturing overhead cost per wheel of the standard model using Activity-Based Costing.

3. Compute the manufacturing overhead cost per deluxe wheel using Crawford's traditional plant-wide overhead rate.  

4. If Crawford continues with the traditional method of allocating manufacturing overhead based on direct labor hours instead of switching to the Activity-Based Costing system, by how much will the Deluxe wheel line be over- or under-costed per unit? Enter an under-costed amount as a negative number and an over-costed amount as a positive number.

Answer 1

Activity	Allocation Base	Activity Cost Allocation Rate
Materials handling	Number of parts	$4.50 per part
Machine setup	Number of setups	$325.00 per setup
Inspection of parts	Number of parts	$31.00 per part
Finishing	Finishing direct labor hours	$51.00
	Standard	x No. of units	Subtotal
Parts per wheel	4	1000	4000
Setups per 1,000 wheels	20	1	20
Finishing direct labor hours per wheel	1	1000	1000
Total direct labor hours per wheel	2.7	1000	2700
	Deluxe	x No. of units	Subtotal
Parts per wheel	6	1000	6000
Setups per 1,000 wheels	20	1	20
Finishing direct labor hours per wheel	3	1000	3000
Total direct labor hours per wheel	3.8	1000	3800
	Standard	Deluxe	Total units	x rate	Total cost
Materials handling	4000	6000	10000	4.5	45,000
Machine setup	20	20	40	325	13,000
Inspection of parts	4000	6000	10000	31	310,000
Finishing	1000	3000	4000	51	204,000
Total Overhead			Ans part 1		$   572,000
	Standard	x rate	Total cost
Materials handling	4000	4.5	18,000
Machine setup	20	325	6,500
Inspection of parts	4000	31	124,000
Finishing	1000	51	51,000
Total Overhead			$ 199,500
÷ total wheels			÷ 1000
Cost per wheel using ABC		Ans part 2	$       199.50
Predetermined overhead rate using traditional cost = Total overhead ÷ Total direct labor hours
	572000 ÷ (2700+3800)
	572000 ÷ (6500)
	$                                        88.00	per DLH
Deluxe Overhead-traditional	$88 x 3800
	$                                    334,400
Per deluxe wheel	(334400÷1000)
	$                                      334.40	Ans part 3
Overhead cost of deluxe under ABC	(572000-199500)÷ 1000
	$                                      372.50
Overhead cost under Traditional	$                                      334.40
Under costed	$                                      (38.10)	Ans part 4