Question

Exercise 9-37 (Static) Activity-Based Costing (LO 9-4, 5)

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 100,000 units of the Sport model and 40,000 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 25 percent.

Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility

		Cost Driver Volume
Activity	Cost Driver	Sport	Pro	Total
Assembly building
Assembling	Machine-hours	6,000	30,000	36,000
Setting up machines	Setup hours	40	400	440
Handling material	Production runs	8	40	48
Packaging building
Inspecting and packing	Direct labor-hours	60,000	22,800	82,800
Shipping	Number of shipments	100	200	300

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

	Sport				Pro
Direct material	$	1,500,000			$	2,400,000
Direct labor
Assembly	$	750,000			$	600,000
Packaging		990,000				360,000
Total direct labor	$	1,740,000			$	960,000
Direct costs	$	3,240,000			$	3,360,000
Overhead
Assembly building
Assembling (@ $30 per MH)	$	180,000			$	900,000
Setting up machine (@ $900 per setup hour)		36,000				360,000
Handling material (@ $3,000 per run)		24,000				120,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour)		300,000				114,000
Shipping (@ $1,320 per shipment)		132,000				264,000
Total ABC overhead	$	672,000			$	1,758,000
Total ABC cost	$	3,912,000			$	5,118,000
Number of units		100,000				40,000
Unit cost	$	39.12			$	127.95

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.

Answer 1

Setup hours for Sport	30	40*75%
Setup hours for Pro	300	400*75%
	Sport	Pro
Direct material	$1,500,000	$2,400,000
Direct labor
Assembly	$750,000	$600,000
Packaging	$990,000	$360,000
Total direct labor	$1,740,000	$960,000
Direct costs	$3,240,000	$3,360,000
Overhead
Assembly building
Assembling (@ $30 per MH)	$180,000	$900,000
Setting up machine (@ $900 per setup hour)	$27,000	$270,000	(30*900; 300*900)
Handling material (@ $3,000 per run)	$24,000	$120,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour)	$300,000	$114,000
Shipping (@ $1,320 per shipment)	$132,000	$264,000
Total ABC overhead	$663,000	$1,668,000
Total ABC cost	$3,903,000	$5,028,000
Number of units	$100,000	$40,000
Unit cost	$39.03	$125.70
Overhead costs allocated to Sports is $663,000
Overhead costs allocated to Pro is $1,668,000

Answer 2

100-25%= 75%