Assign overhead costs using traditional costing and ABC compare results P5.48B L
ID: 2397218 • Letter: A
Question
Assign overhead costs using traditional costing and ABC compare results P5.48B LO1., 2) National Steel Company has budgeted manufacturing overhead costs of S2.5 million. It has allocated (tanar Stecide toexpermert overhead on a plant-wide basis to its two products (Standard Steel and Deluxe Steel) using machine hours, which are estimated to be 100,000 for the current year. The company has decided to experiment with activity-based costing and has created five activity cost pools and related activity cost drivers as follows: Activity Centre Cost DriverEstimated Overhead Material handling Number of moves 250,000 Purchase orders Number of orders Product testing Number of tests Machine set-up Number of set-ups Estimated Activity 200,000 450,000 600,000 1.000,000 50,000 moves 4,000 orders 9,000 tests 6,000 set-ups Machining Machine hours 100,000 machine hoursExplanation / Answer
a.
Calculation of Total manufacturing Cost
Traditional Product Costing Method
Standard Steel
Deluxe Steel
Direct Material Cost
$ 200.00
$ 250.00
Direct Labour Cost
$ 100.00
$ 120.00
Overheads Cost
$ 1,250.00
$ 1,250.00
Total Manufacturing Cost
$ 1,550.00
$ 1,620.00
Working Note for Overhead Cost
Standard Steel
Deluxe Steel
(A) Cost per Machine Hour ( As Calculated in Statement of cost Pool given below)
$ 25.00
$ 25.00
(B) No of Machine Hours
50.00
50.00
(C=A*B ) Overhead Cost
$ 1,250.00
$ 1,250.00
b.
Statement of Cost Pool Showing Activity Based Overhead Rates
Overheads
Amount of Overheads (A)
Cost Driver
Estimated Acticity (B)
Cost Per Activity C= (A/B)
Material Handling
$ 250,000.00
No of Moves
50,000.00
$ 5.00
Purchase Orders
$ 200,000.00
No of Orders
4,000.00
$ 50.00
Product Testing
$ 450,000.00
No of Tests
9,000.00
$ 50.00
Machine Set-ups
$ 600,000.00
No of Set-ups
6,000.00
$ 100.00
Machining
$ 1,000,000.00
Machine Hours
100,000.00
$ 10.00
$ 2,500,000.00
c.
Calculation of Total manufacturing Cost
Cost Allocation Using Activity Based Costing.
Standard Steel
Deluxe Steel
Direct Material Cost
$ 200.00
$ 250.00
Direct Labour Cost
$ 100.00
$ 120.00
Overheads Cost
$ 1,275.00
$ 1,900.00
Total Manufacturing Cost
$ 1,575.00
$ 2,270.00
Working Note for Overhead Cost
Standard Steel
Deluxe Steel
Rate of Activity (A)
Activity Quantity (B)
Amount (C=A*B)
Rate of Activity (A)
Activity Quantity (B)
Amount (C=A*B)
Material Handling
$ 5.00
5.00
$ 25.00
$ 5.00
10.00
$ 50.00
Purchase Orders
$ 50.00
2.00
$ 100.00
$ 50.00
3.00
$ 150.00
Product Testing
$ 50.00
3.00
$ 150.00
$ 50.00
4.00
$ 200.00
Machine Set-ups
$ 100.00
5.00
$ 500.00
$ 100.00
10.00
$ 1,000.00
Machining
$ 10.00
50.00
$ 500.00
$ 10.00
50.00
$ 500.00
$ 1,275.00
$ 1,900.00
Memo
To The President
National Steel Company
Sir,
I have calculated Total manufacturing cost by using ABC Analysis which is a better way to calculate overhead cost.Traditional method does not give fair results and can be misleading.
As it can be seen from the analysis given below that total cost are Different under different methods.
Standard Steel
Deluxe Steel
Total cost Using Activity Based Costing.
$ 1,575.00
$ 2,270.00
Total Cost using Traditional Product Costing Method
$ 1,550.00
$ 1,620.00
Thank you
a.
Calculation of Total manufacturing Cost
Traditional Product Costing Method
Standard Steel
Deluxe Steel
Direct Material Cost
$ 200.00
$ 250.00
Direct Labour Cost
$ 100.00
$ 120.00
Overheads Cost
$ 1,250.00
$ 1,250.00
Total Manufacturing Cost
$ 1,550.00
$ 1,620.00
Working Note for Overhead Cost
Standard Steel
Deluxe Steel
(A) Cost per Machine Hour ( As Calculated in Statement of cost Pool given below)
$ 25.00
$ 25.00
(B) No of Machine Hours
50.00
50.00
(C=A*B ) Overhead Cost
$ 1,250.00
$ 1,250.00