After reading an article about activity-based costing in a trade journal for the furniture industry^ Adria Lopez wondered if it was time to critically analyze overhead costs at Success Systems. In a recent months Lopez found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.
Setting up machines............ $20,000 25 batches
Inspecting components ......... $ 7,500 5.000 parts
Providing utilities $10,000 5,000 machine hours
Overhead has been applied to output at a rate of 50% of direct labor costs. The following data pertain to Job 6.15,
Direct materials.......... $2,500 Number of parts ......... 4O0 parts
Direct labor.................................. $3,500 Machine hours........... 600 machine hours
Batches........____ ..... 2 batches
What is the total cost of Job 6.15 if Success Systems applies overhead at 50%." of direct labor cost?
What is the total cost of Job 6.15 if Success Systems uses activity-based costing?
Which approach to assigning overhead gives a better representation of the costs incurred to produce Job 6.15? Explain.