Question

Activity-based costing problem

Factory A produces golf carts. One of its plants in Texas produces two versions of carts: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, bigger tires, and softer seats. At the beginning of the year, the following data were prepared by the controller’s office for this Texas plant:

                                                                                         Basic                         Deluxe

Expected Quantity to Produce                         20,000 carts                 10,000 carts

Selling Price                                                                $ 1,800                       $ 3,600

Direct Material Cost                                                    $     500                       $ 1,000

Direct Labor Cost                                                        $     300                       $     600

Machine Hours                                                               1,000                           3,000

Direct Labor Hours                                                     10,000                       10,000

Activity Center (Cost Driver)

Engineering Support (Hours)                                          1,500                           4,500

Receiving (Orders Processed)                                            300                              500

Material Handling (Number of Moves)                          2,000                           4,000

Purchasing (Number of Orders)                                        100                              200

Maintenance (Machine Hours Used)                              1,000                           3,000

Paying Suppliers (Invoices Processed)                              250                              500

Equipment Setups (Number of Setups)                                20                                60

Total overhead costs of $6,000,000 associated with activity centers are reported as:

Maintaining Equipment                                               $ 1,140,000

Engineering Support                                                   $ 1,200,000

Material Handling                                                       $ 1,200,000

Setting Up Equipment                                                 $    960,000

Purchasing Materials                                                   $    600,000

Receiving Goods                                                         $    400,000

Paying Suppliers                                                         $    300,000

Providing Facility Space                                             $    200,000

Facility-level costs are allocated on basis of machine hours used . This provides a measure of time the facility is used by each product.

Requirements:

Calculate the cost to produce each type of cart using direct labor hours as basis to allocate overhead costs.

Calculate the cost to produce each type of cart using activity-based-costing.

Explain the difference in the costs using the two different accounting systems. Provide appropriate supporting quantitative analysis.

Answer 1

Calculate the cost to produce each type of cart using direct labor hours as basis to allocate overhead costs.
Traditional overhead rate = Total overhead cost ÷ total direct labor hours
		6000000 / 20000
		300	per direct labor hour
	Manufacturing Cost per unit
		Basic	Deluxe
	Direct material cost	500	1000
	Direct labor cost	300	600
	Manufacturing OH	150	300
	Total Manuf. Cost	950	1900
	(10000 x 300)/20000 = 150
	(10000 x 300)/10000 = 300
Calculate the cost to produce each type of cart using activity-based-costing.
	Activity	Activity cost	÷ activity driver =		Activity rate
	Maintaining Equipment	$1,140,000	4000	MH	285	per MH
	Engineering Support	$1,200,000	6000	Hrs	200	per hour
	Material Handling	$1,200,000	6000	Moves	200	per move
	Setting Up Equipment	$960,000	80	Setups	12000	per setup
	Purchasing Materials	$600,000	300	orders	2000	per order
	Receiving Goods	$400,000	800	orders processed	500	per order processed
	Paying Suppliers	$300,000	750	Invoices processed	400	per invoice processed
	Providing Facility Space	$200,000	4000	MH	50	per MH
	ABC overhead allocation
		Basic		Deluxe
	Maintaining Equipment	285,000	=285*1000	855,000	=285*3000
	Engineering Support	300,000	=200*1500	900,000	=200*4500
	Material Handling	400,000	=200*2000	800,000	=200*4000
	Setting Up Equipment	240,000	=12000*20	720,000	=12000*60
	Purchasing Materials	200,000	=2000*100	400,000	=2000*200
	Receiving Goods	150,000	=500*300	250,000	=500*500
	Paying Suppliers	100,000	=400*250	200,000	=400*500
	Providing Facility Space	50,000	=50*1000	150,000	=50*3000
	Total allocated OH	1,725,000		4,275,000
	÷ NO of units	20000		10000
	per unit MOH	86.25		427.50
	Manufacturing Cost per unit - ABC
		Basic	Deluxe
	Direct material cost	500	1000
	Direct labor cost	300	600
	Manufacturing OH	86.25	427.50
	Total Manuf. Cost	$               886.25	$                      2,027.50
Explain the difference in the costs using the two different accounting systems. Provide appropriate supporting quantitative analysis.
		ABC	Traditional
	Basic	86.25	150
	Deluxe	427.5	300
	In the ABC OH cost per unit have changed significantly, since under traditional costing all overhead is allocated using
	direct labor hour that is consuming same direct labor hour, under ABC cost is divided between different activity pools
	that is source of cost and there is clearly visible in ABC that how much cost is used by each model.