Serenity Now Industries manufactures custom fiberglass hulls for luxury yachts and pleasure
boats. The current cost accounting system uses machine hours to allocate manufacturing
overhead to each job. Serenity estimates that in the coming year it will incur $600,000 in
manufacturing overhead costs and use 8,000 machine hours.
Depending on the specifications requested by the customer, the hull may use hazardous
chemicals that incur greater disposal costs. Serenity’s traditional accounting system includes the
cost of hazardous waste disposal in with total manufacturing overhead. Serenity is planning to
implement an activity based costing system to more accurately assign hazardous waste disposal
costs to each job.
Expected usage and costs for manufacturing overhead are as follows:
During the year, Yacht #633 was started and completed:
DM cost per lb.
$55
Lbs. of DM used on job
170
DL cost per hr.
$20.00
Cost pool description
Cost pool
Cost driver
Cost driver usage
Cost pool rate
Machine maintenance
costs
$200,000
Number of machine
hours
8,000
$25.00
Engineering change
orders
$100,000
Number of change orders
1,250.00
$80.00
Hazardous waste
disposal
$300,000
Gallons of hazard waste
generated
800
$375.00
$600,000
DLH used
50