Question - ABC: Comparison to traditional costing
Surfs Up manufactures surfboards. The company produces two models: the small board and the big board. Data regarding the two boards are as follows:
|
Product
|
DL per Unit
|
Annual Production
|
Total DL hours
|
|
Big
|
1.5
|
10 000 boards
|
15000
|
|
Small
|
1
|
35 000 boards
|
35000
|
The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labour rate of $13 per hour. The company has historically used direct labour hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1 664 000 per year.
Volume of annual activity
|
Activity Centre
|
Cost drivers
|
Traceable cots
|
Big board
|
Small board
|
|
Machine setup
|
Number of setups
|
$100,000.00
|
100
|
100
|
|
Special design
|
Design hours
|
$364,000
|
900
|
100
|
|
Production
|
DL hours
|
$900,000
|
15000
|
35000
|
|
Machining
|
Machine hours
|
$300.000
|
9000
|
1000
|
a. Calculate the overhead rate based on traditional overhead allocation with direct labour hours as the base.
b. Determine the total cost to produce one unit of each product. (Use the overhead rate calculated in question A.)
c. Calculate the overhead rate for each activity centre based on activity-based costing techniques.
d. Determine the total cost to produce one unit of each product. Use the overhead rates calculated in question C.