Question

Boxes Ltd manufactures two types of boxes, plastic and cardboard, and currently it applies manufacturing overhead to all units at the rate of $50 per direct labour hour. Production information is as follows:

                 

Product Information

	Plastic box	Cardboard box
Direct material cost per unit	$20	$10
Direct labour cost per hour	$20	$10
Number of units produced	100,000	200,000

The management accountant Sally suggests that Activity-Based Costing (ABC) is more appropriate for the firm. She suggests the firm’s overhead can be identified with three activities: setups, machine processing and inspections.

The firm’s total overhead of $4,500,000 is subdivided as follows:

• Setups: $800,000
• Machine processing: $3,500,000
• Inspections: $200,000

Information on the number of setups, labour hours, machine hours and the number of inspections is below:

	Plastic Box	Cardboard Box	Total
Labour hours	20,000	80,000	100,000
Number of setups	80	120	200
Machine hours	60,000	40,000	100,000
Number of inspections	50	30	80

Required:

SHOW CALCULATIONS FOR EACH QUESTION IN THE RESPONSE BOX.

1. Calculate the unit manufacturing overhead cost of plastic and cardboard boxes using the company’s current overhead costing procedures.
2. Calculate the unit manufacturing overhead cost of plastic and cardboard boxes using the Activity-Based Costing (ABC) method.
3. Which overhead allocation method would you recommend Boxes Ltd to use and Explain why?

Answer 1