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In the past, the Roils Royally Engine Division (Roils) allocated indirect manufacturing costs based on direct...

In the past, the Roils Royally Engine Division (Roils) allocated indirect manufacturing costs based on direct labour hours. Recently, management has decided to pilot a system of time-driven activity-based costing (TDABC) to allocate these costs. The division produces three engine models: Basic, Sport, and Heavy Duty. Roils employs 300 employees to perform indirect labour functions, consisting of machine setups, engine inspections and shipping. Each employee is paid $50,000 per year on average, including benefits. On average, each employee works 1,600 hours per year. Each automated production machine is used 1,600 hours per year, including set up time. Once a machine is set up, no labour is necessary to oversee it.

The following information has been obtained from the company’s records over the past year:

Basic Sport Heavy Duty
Units produced 500,000 150,000 50,000
Direct material cost per unit $40 $50 $60
Direct labour cost per hour $30 $30 $30
Direct labour hours incurred 200,000 225,000 40,000
Inspections per engine 2 3 4
Inspection time per engine (hrs.) .1 .2 .3
Engines packed and shipped per batch 2,000 1,000 500
Individual engine packing time (hrs.) .25 .3 .4
Additional preparation time per batch (hrs.) 30 20 15
Machine set-ups per year 240 180 60
Labour hours for each machine set-up 30 40 60

Required

1. Determine the indirect labor support costs for each engine using time-driven activity-based costing

2. Determine the per cent of unused indirect labour compared to available indirect labour hours. Draw conclusions from this analysis.

Solutions

Expert Solution

Working-1

Indirect Labor-No of Employees 300
Each employee working every year 1600 Hours per year
Wages each employee 50000 each employee
Available Indirect Labor Hour 300*1600 480000
Indirect Labor Cost 300*50000 15000000

Per Hour Rate

Number 1 Indirect Labor Cost based on Time driven Activity based costing
Unit Produced 500000 150000 50000
Basic Support Heavy Duty
1 Inspections time per engine 0.1 0.2 0.3
Total Inspection Time (Unit*Time) 50000 30000 15000 A
2a Packing Time 0.25 0.3 0.4
Total Packing Time (Unit*Time) 125000 45000 20000
2b Per Batch 2000 1000 500
Additional Preparation time per batch 30 20 15
Total Time for Shipping (Per batch*Add time) 60000 20000 7500
2 Total Packing Shipping Time 185000 65000 27500 B
3 Machine Set UP Per Year 240 180 60
Hour for each machine set up 30 40 60
Total Machine Set UP Hour (Set UP per year* Hours) 7200 7200 3600 C
Total Indirect Hours (A+B+C) 242200 102200 46100
Total Indirect Hours (A+B+C) 390500
Total Cost (Indirect Hours*Per hour rate 31.25 (working-1) 12203125

31.25

2.

Total Available Indirect Labor Hours (Working-1) 480000
Used Indirect Labor Hours (Pard-1) 390500
Unused Indirect Labor Hours (Available-Used) 89500
% UnUSed 89500/480000                                   18.65

Time Drive activity based costing give more practical and actual results as can be seen in above example. We do not need to apply 100% of available hours to product cost

ekkarill92 answered 1 year ago
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