In: Accounting
Single Plantwide Rate and Activity-Based Costing
Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators:
Three Representative Refrigerators |
Number of Machine Hours |
Number of Setups |
Number of Sales Orders |
Number of Units |
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Refrigerator—Low Volume | 20 | 22 | 66 | 100 | ||||||||||||||||||||||||||||||||||||||
Refrigerator—Medium Volume | 320 | 20 | 147 | 1,600 | ||||||||||||||||||||||||||||||||||||||
Refrigerator—High Volume | 1,000 | 15 | 220 | 5,000 |
Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $100 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rateinformation is assumed to be as follows:
|
percent change in per-unit allocation from the single to activity-based rate methods
Column A | Column B | Column C | |
Product Volume Class | Single Rate | ABC | |
Overhead Allocation | Overhead Allocation | Percent Change in | |
Per Unit | Per Unit | Allocation | |
Low | 20 | 72.8 | 264% |
Medium | 20 | 24.6 | 23% |
High | 20 | 21.8 | 9% |
Working Notes:
Cost by Plantwide method
Three Representative | Number of | |||||
Refrigerators | Machine Hours | Machine hour rate | Total factory overhead | Total units | Per Unit allocation | |
Refrigerator—Low Volume | 20 | 100 | 2,000 | 100 | 20 | |
Refrigerator—Medium Volume | 320 | 100 | 32,000 | 1,600 | 20 | |
Refrigerator—High Volume | 1,000 | 100 | 100,000 | 5,000 | 20 |
Cost by ABC
Refrigerator low volume | Refrigerator medium volume | Refrigerator high volume | |||||||
Activity | Base Usage | Activity Rate | Activity Cost | Base Usage | Activity Rate | Activity Cost | Base Usage | Activity Rate | Activity Cost |
(a) | (b) | (c ) | (a) | (b) | (c ) | (a) | (b) | (c ) | |
Machining activity | 20 | $ 100 | 2,000 | 320 | $ 100 | 32,000 | 1,000 | $ 100 | 100,000 |
Setup activity | 22 | $ 150 | 3,300 | 20 | $ 150 | 3,000 | 15 | $ 150 | 2,250 |
Sales Order processing activity | 66 | $ 30 | 1,980 | 147 | $ 30 | 4,410 | 220 | $ 30 | 6,600 |
Total activity cost | 7,280 | 39,410 | 108,850 | ||||||
Total units | 100 | 1,600 | 5,000 | ||||||
Per unit cost | 72.8 | 24.6 | 21.8 |