Question

After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 112,000 units of the Sport model and 46,000 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 23 percent.

Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility

		Cost Driver Volume
Activity	Cost Driver	Sport	Pro	Total
Assembly building
Assembling	Machine-hours	7,200	31,200	38,400
Setting up machines	Setup hours	52	520	572
Handling material	Production runs	20	52	72
Packaging building
Inspecting and packing	Direct labor-hours	64,800	25,200	90,000
Shipping	Number of shipments	112	224	336

Third Quarter Unit Cost Report, Activity-Based Costing—CenterPoint Manufacturing Facility

	Sport				Pro
Direct material	$	1,512,000			$	2,424,000
Direct labor
Assembly	$	762,000			$	624,000
Packaging		1,002,000				384,000
Total direct labor	$	1,764,000			$	1,008,000
Direct costs	$	3,276,000			$	3,432,000
Overhead
Assembly building
Assembling (@ $30 per MH)	$	216,000			$	936,000
Setting up machine (@ $900 per setup hour)		46,800				468,000
Handling material (@ $3,000 per run)		60,000				156,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour)		324,000				126,000
Shipping (@ $1,320 per shipment)		147,840				295,680
Total ABC overhead	$	794,640			$	1,981,680
Total ABC cost	$	4,070,640			$	5,413,680
Number of units		112,000				46,000
Unit cost	$	36.35			$	117.69

Required:

a. Compute the amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900.

	Model Total ABC Overhead Sport Pro

Answer 1

Solution the given question, Tom spencer - the production supesu believes that with more efficient setup routine he co reduce the number of setup hours for both spor and the Pro Products by 23.1. If such is Case, sevised cost Driver volume for setup hours, redure by 23%. Revised nost Driver volume would be up hours would Total (9) cost Driver sport Set up hours 40.04 400.40 440 44 (52x774) (520X27%) All the events, except setup hours will remain same in first quarter as in the third quarter . Calculation of Total overhead as por ABC method Particulars Remark / working Sport - (1) Assembly building 936000 (a) Assembly 216000 Remain same (b) Setup machine Revised as the 360360 Setup hours been (900X4004) (90 . (6) Handling material Remain same 69.coo 156000 (2) lacking building 3,24,000 co) Remain 126,000 Inspecting and Packing same (b) shipping Remain same 147,840 295,680 36,036 revised Oneshead 783,876 18,74,040 Total ABC Answer: model Sport 800 Total ABC overhead $7,83, 846 $ 18,74040