Question

William Company is contemplating the establishment of an activil applies all overhead costs based on direct labor costs. The company has est unemplating the establishment of an activity-based costing (ABC) system. It currently activities for May: direct labor costs. The company has estimated the following costs and Table 1: Cost Activity Machine Setups $33,600 400 setups Utilities 60,000 200,000 usage hours Materials Handling 84,000 12,500 crates Direct labor 35,520 S20 per labor hour Direct material 60,000 $1 per pound Direct labor cost is $20 per hour. The following information pertains to the actual production of buckets and pails during May: Table 2: Buckets Units produced 60,000 Direct material cost incurred $30,000 Direct labor cost incurred ($20 per hour) $24,000 Setups implemented 120 Crates handled 6,800 Utility hours used 80,000 Pails 40,000 $31,200 $12,000 290 5,200 125,000 1. Which items are cost pools? 2. Which are cost drivers? 3. Which are cost objectives? How much is the product cost per pail if William Company uses one cost pool to allocate all overhead costs to the cost objectives? c. How much is the product cost per pail if William Company uses ABC?

Answer 1

1. 1. Items of Cost Pool are as follows:

• Machine Set ups
• Utilities
• Material Handling

2. Cost Drivers are as follows:

• Setups Implemented
• Usage of utility hours
• Crates Handled

              3. Cost Objectives are as follows:

• Buckets
• Pails

2. Product Cost Per Pail if one cost pool is used to allocate all overheads=$ 2.58

Explanation:

Total Overheads=$ 177600

Total Direct Labor Hours=1776 hours($ 35520/$ 20)

Therefore Overheads per direct labor hour=$ 100 per direct labor hour

Particulars	Amount
Direct Material	$ 31200
Direct Labor	$ 12000
Overheads(600 direct labor hours* $ 100 per hour)	$ 60000
Total Cost	$ 103200
Total Units	40000
Cost per unit of pail	$ 2.58

3. Product Cost Per Pail if ABC is used to allocate all overheads=$ 3.50

Explanation:

Cost Pool	Cost	Cost Driver	Cost/Cost Driver
Machine Setups	$ 33600	Setups (400 set ups)	$ 84 /set up
Utilities	$ 60000	Usage Hours (200000 hours)	$ 0.3 per utility hour
Material Handling	$ 84000	Crates (12500 crates)	$ 6.72 per crate

Allocation of Cost for Pails

Particulars	Cost
Direct Material	$ 31200
Direct Labor	$ 12000
Machine Setups( 290 setups* $ 84 per set up)	$ 24360
Utilities( 125000 utility hours* $ 0.3 per utility hour)	$ 37500
Material Handling( 5200 crates* $ 6.72 per crate)	$ 34944
Total Cost	$ 140004
Total Units Produced	40000
Cost Per unit	$ 3.50