Question:
Activity-based costing MedTech, Inc., manufactures and sells diagnostic equipment used in the medical profession. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning four manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $25 per hour and that there were no beginning inventories. The following information was available for 2010, based on an expected production level of 100,000 units for the year:
|
Activity
|
Budgeted
|
Cost Driver Used
|
Cost
|
|
(Cost Driver)
|
Costs for 2010
|
as Allocation Base
|
Allocation Rate
|
|
Materials handling
|
$1,200,000
|
Number of parts used
|
$ 2.00 per part
|
|
Milling and grinding
|
2,200,000
|
Number of machine hours
|
11.00 per hour
|
|
Assembly and inspection
|
1,500,000
|
Direct labor hours worked
|
5.00 per hour
|
|
Testing
|
300,000
|
Number of units tested
|
3.00 per unit
|
The following production, costs, and activities occurred during the month of August:
|
Units
|
Direct
|
Number
|
Machine
|
Direct
|
|
Produced/Tested
|
Materials Costs
|
of Parts Used
|
Hours
|
Labor Hours
|
|
10,000
|
$900,000
|
62,000
|
18,000
|
35,000
|
Required:
a. Calculate the total manufacturing costs and the cost per unit produced and tested during the month of August for MedTech, Inc.
b. Explain the advantages of the ABC approach relative to using a single predetermined overhead application rate based on direct labor hours