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RD
RD, Certified Public Accountant (CPA)
Category: Finance
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Experience:  MBA, CPA
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1.Using the info below, calculate total manufacturing cost ...

Resolved Question:

1.Using the info below, calculate total manufacturing cost and cost per unit for coffee tables produced during July using activity based costing
2. Using the same info, calculate total manufacturing cost and cost per unit for coffee tables produced during July by applying manufacturing overhead on a direct labor hour basis instead of activity based costing.

Activity Drivers:                   2004 Budgeted Amts:
Materials & handling               250,000
Cutting and lathe work           1,750,000
Assembly & inspection           4,000,000

Cost Allocation Rate:                        Cost Driver for allocation
Materials/Handling     0.20 per part      no. of parts used
Cutting/lathe work     1.40 per part      no. of parts used
Direct labor hrs        20.00 per hour    direct labor hours

July production, costs and activities:
No. of units produced: 3,200

Direct material costs:
$107,200

No. of parts used:
70,400

Direct labor hrs: 13, 120
Submitted: 9 years ago.
Category: Finance
Expert:  RD replied 9 years ago.

graphic

 

graphic

Customer: replied 9 years ago.
I didn't mention that the stated direct labor rate is $15.00 per hour, and that there was no beginning inventories. The expected production level for the year was 50,000 units. The question box limited the number of characters I could type, so I could not supply all of the information. You have direct labor rate as 10.00 per hour. Will you please recalculate? and send asap. Also, based on the two different per unit cost figures from question one and two, I need to know which system is preferable (ABC or traditional)for manufacturing managers and why.
I have to go to work at 1pm, so if your answer is not posted by then, I won't be able to accept or decline the answer until after 5pm today. I will check back in then, and post another accounting problem.
Thanks for your help.
Expert:  RD replied 9 years ago.

Cost Allocation Rate: Cost Driver for allocation
Materials/Handling 0.20 per part no. of parts used
Cutting/lathe work 1.40 per part no. of parts used
Direct labor hrs 20.00 per hour direct labor hours

The above information was used for direct labor rate....(Assemebly and Inspection - will that be considered OH ?)

Customer: replied 9 years ago.
I'm not certain, but I would think so, given that assembly and inspection are part of direct labor.
This is where I need your help. Should the assembly and inspection be included in allocation for traditional costing? I know that it would be included for activity based costing because with ABC, all activities have to be cost associated.
Expert:  RD replied 9 years ago.

graphic

The above seems to be the correct solution- considering the budgeted amount, the direct labor allocation rate for Overhead is calculated for answer to Q.2. I have considered Assembling and inspection as part of overhead ....since the question in the budget for 2004 considers that as part of overhead.

ABC is preferable as it provides accurate costing and can help a great deal in decision making specially while quoting price for a product which is very competitive. Traditional method is easier to use as it based on a rate calculated based on past experience but it is not as accurate as the ABC.

Let me know if you have any question. Bonus and Feedback will be highly appreciated!!!

 

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Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases

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