After reading an article about activity-based costing in a trade journal for the
ID: 2413065 • Letter: A
Question
After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Santana found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.
Overhead has been applied to output at a rate of 45% of direct labor costs. The following data pertain to Job 615.
Required:
1. Classify each of its three overhead activities as unit level, batch level, product level, or facility level.
2. What is the total cost of Job 615 if Business Solutions applies overhead at 45% of direct labor cost?
3. What is the total cost of Job 615 if Business Solutions uses activity-based costing?
Activity Cost Driver Setting up machinfes $ 19,500 26 batches Inspecting components $ 5,400 5,400 parts Providing utilities $ 10,800 5,400 machine hoursExplanation / Answer
ANSWER:
1. CLASSIFICATION OF OVERHEADS:
Overheads
Classification
Reason
Setting up machines
Batch level activity
Batch level activities are those activities which varies based on number of bathes produced
Inspecting components
Product level activity
Product level activities are those activities which supports the product line
Providing utilities
Facility level activity
Facility level activities are those activities which are not directly related to individual product but have use of overall process
2.TOTAL COST OF JOB 615 IN TRADITIONAL COSTING:
Particulars
Amount ($)
Direct materials
2,100
Direct labor
3,600
Overhead (45% of direct labor)
1620
TOTAL COST
7,320
3. TOTAL COST OF JOB 615 IN ACTIVITY BASED COSTING:
Particulars
Amount ($)
Direct materials
2,100
Direct labor
3,600
Overhead:
Setting up machines (19500/26*5)
3750
Inspecting components (5400/5400*540)
540
Providing utilities (10800/5400*570)
1140
TOTAL COST
11,130
Overheads
Classification
Reason
Setting up machines
Batch level activity
Batch level activities are those activities which varies based on number of bathes produced
Inspecting components
Product level activity
Product level activities are those activities which supports the product line
Providing utilities
Facility level activity
Facility level activities are those activities which are not directly related to individual product but have use of overall process