Problem:
Activity-based costing versus traditional overhead allocation methods.. Summerset Industries manufacturers and sells custom-made windows. 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 three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $18 per hour and that there were no beginning inventories. The following information was available for 2007, based on an expected production level of 50,000 units for the year, which will require 200,000 direct labor hours:
|
Activity
|
Budgeted
|
Cost Driver Used
|
Cost
|
|
(Cost Driver)
|
Costs for 2007
|
as Allocation Base
|
Allocation Rate
|
|
|
|
|
|
|
Materials handling
|
$225,000
|
Number of parts used
|
$0.18 per part
|
|
Cutting and lathe work
|
$1,875,000
|
Number of parts used
|
$1,50 per part
|
|
Assembly and inspection
|
$4,400,000
|
Direct labor hours
|
$22.00 per hour
|
The following production, costs, and activities occurred during the month of February:
|
Units
|
Direct
|
Number
|
Direct
|
|
Produced
|
Materials Costs
|
of Parts Used
|
Labor Hours
|
|
|
|
|
|
|
3,400
|
$126,240
|
74,800
|
14,320
|
Required to do:
Q1. Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of February (using) the activity-based costing approach).
Q2. Assume instead that Summerset Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity-based costing system described above). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of February. (Hint: You will need to calculate the predetermined overhead application rate using the total budgeted overhead costs for 2007.)
Q3. Compare the per unit cost figures calculated in parts (1) and (2). Which approach do you think provides better information for manufacturing managers? Explain your answer.