Charles Jackson, the accounting manager at Big Al's , has just returned from a conference on activity-based costing in Seattle and thinks big Al's should consider implementing an ABC system at the beginning of Year 2. Charles has identified five primary activities taking place in the production facility at Big Al's, has traced overhead costs to each activity, and has identified a cost driver for each activity as follows:
Estimated Year 2 Overhead Costs
Activity Monthly Overhead Cost Cost Driver
Material delivery /handling $4,620 # of shipments
Assembly of pizzas $5,670 Direct Labor hours
Packaging $1,260 Number of pizzas
Storage of materials $3,150 Refrigerator space
Quality inspections $2,100 Number of inspections
Big Al's gets material for the veggie pizzas twice per week so the veggies can remain fresh and crisp until used in production. Veggie pizzas are also thicker, due to the height of the toppings, than a one topping meat pizza, so more refrigerator space is estimated to be needed. Big Al's has also determined that meat pizza's need to be inspected more frequently for quality control due to the much higher volume of production. Charles has estimated the activity for each cost driver as follows:
Meat Pizzas Veggie Pizzas Total
Number of material shipments 52 108 160
Direct Labor Hours 87,500 7,000 94,500
Number of Pizzas 352,800 25,200 378,000
Refrigerator space (cubic feet) 2,500 500 3,000
Number of inspections 80,000 4,000 84,000