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

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 8 months ago

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