Question

In: Accounting

After reading an article about activity-based costing in a trade journal for the furniture industry, Santana...

After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Santana found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.

Activity                                                     Cost                                            Driver

Setting up machines                       $24,940                                    29 batches

Inspecting components                    $ 5,200                                         5,200 parts

Providing utilities                              $10,400                                 5,200 machine hours

Overhead has been applied to output at a rate of 50% of direct labor costs. The following data pertain to Job 615.

Direct materials                           $2,400

Direct labor                                   $3,100

Batches                                           3 batches

Number of parts                             450 parts

Machine hours                           570 machine hours

Required:

A: Classify each of its three overhead activities as unit level, batch level, product level, or facility level.

Setting up machines, Inspecting components and providing utilities

B: What is the total cost of Job 615 if Business Solutions applies overhead at 50% of direct labor cost?

C: What is the total cost of Job 615 if Business Solutions uses activity-based costing?                Total manufacturing cost $9,670 4.

Note: Please solve the problem completely with details that I can practice and learn. Thank you.

Solutions

Expert Solution

A.Classification:

Activity

Type

Reason

Setting up machines                       

Batch level

Once setup, it produces a batch

Inspecting components

Product Level

Each product to be inspected

Providing utilities

Facility Level

Based on Machine Hours

B. Calculation of Total Cost of Job 615:

Direct Materials

2,400

Direct Labor

3,100

Overheads @ 50% of Labor Cost

1,550

Total Cost

$7,050

C. Cost Allocation Sheet

Overhead

Amount

Basis

Rate per Activity

Setting up machines                       

24,940

29 Batches

860

Inspecting components

5,200

5,200 parts

1

Providing utilities

10,400

5,200 machine hours

2

Calculation of Total Cost of Job 615:

Direct Materials

2,400

Direct Labor

3,100

Overheads:

Setting up Machine 3*860

2,580

Inspection 1*450

450

Utilities 2*570

1,140

Total Cost

$9,670


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