Problem 4-48 Name:
Insert your answers in the gray-shaded cells of columns B, E and G. If an
answer is incorrect, the word “wrong” will appear.
a. Predetermined overhead rate:
Budgeted overhead 5,850,000$
Budgeted machine hours 1,000,000
Predetermined overhead rate per machine hour 5.85$
b.
Direct material 50,000$
Direct labor 150,000
Applied overhead 29,250
Total cost 229,250$
Divided by the number of doors 2,500
Cost per door 91.70$
c.
Electric power:
Budgeted electric power cost 500,000$
Budgeted kilowatt hours 200,000
Predetermined overhead rate per kilowatt hour 2.50$
Work cells:
Budgeted work cell cost 3,000,000$
Budgeted square feet 300,000
Predetermined overhead rate per square foot 10.00$
Material handling:
Budgeted material handling cost 1,000,000$
Budgeted material moves 200,000
Predetermined overhead rate per move 5.00$
Quality control inspections:
Budgeted inspection cost 1,000,000$
Budgeted number of inspections 50,000
Predetermined overhead rate per inspection 20.00$
Product runs:
Budgeted machine setup cost 350,000$
Solution
Manufacturing cost per door:
Manufacturing cost per door using ABC:
Predetermined rate per activity per unit of cost driver:
Budgeted production runs 25,000
Predetermined overhead rate per setup 14.00$
Cost per door:
Direct material 50,000$
Direct labor 150,000
Applied overhead
Electric power 1,250$
Work cells 10,000
Materials handling 100
Quality control 300
Setups 84 11,734
Total cost 211,734$
÷ Number of doors 2,500
Cost per door 84.69$
d.
Present
System
ABC System
Unit costs 91.70$ 84.69$
Plus gross profit at 40% 36.68 33.88
Selling price 128.38$ 118.57$
The activity-based costing method allocates the cost pools of manufacturing
overhead to various cost drivers and then to products based on the amount or
number or other bases that each product consumes in various cost drivers.
Assume that Strickland’s policy is to add 40% to manufacturing cost as gross
profit to cover costs such as administrative expenses, selling expenses, financial
expenses, and research and development expenses and the remainder will be
profit. In determining the selling price of the door under both methods add 40% of
total manufacturing costs:
It is evident that a selling advantage results from the ABC method. As illustrated
in this case, the ABC method should result in a pricing decision that makes the
company more competitive in the marketplace. Savings in applying manufacturing
overhead costs to products will enable the company to sell its products at a lower
price than competitors while maintaining the gross margin ratio.
If ABM were implemented first, Strickland might be able to significantly reduce or
eliminate the material handling and quality inspections costs. Both of these items
are NVA and create $2,000,000 of the total $5,850,000 (or 34%) of manufacturing
overhead costs.