The cordless phone manufacturing division of a Denver-based consumer electronics
ID: 2418991 • Letter: T
Question
The cordless phone manufacturing division of a Denver-based consumer electronics company uses activity-based accounting. For simplicity, assume that its accountants have identified only the following three activities and related cost drivers for indirect production costs.
Activity Cost Driver
Materials handling Direct-materials cost
Engineering Engineering change notices
Power Kilowatt hours
Three types of cordless phones are produced: Senior, Basic, and Deluxe. Direct costs and cost-driver activity for each product for a recent month are as follows:
Senior Basic Deluxe
Direct-materials cost $ 25,000 $5,000 $ 125,000
Direct-labor cost $ 4,000 $1,000 $ 3,000
Kilowatt hours 50,000 200,000 150,000
Engineering change notices 13 5 2
Indirect production cost for the month was:
Materials handling $ 8,000
Engineering 20,000
Power 16,000
Total indirect production cost $ 44,000
Required:
1. Compute the indirect production cost allocated to each product with the activity-based costing system.
2. Suppose all indirect production costs had been allocated to products in proportion to their direct-labor costs. Compute the indirect production allocated to each product.
3. In which product costs, those in Requirement 1 or those in Requirement 2, do you have the most confidence? Why?
Explanation / Answer
Actvity Cost driven Material Handlng Direct material cost Engineering Engineering change notices Power Kilowatt hour SA 2 SA 5 SA 9 Direct material cost 25000 5000 125000 Direct Labour cost 4000 1000 3000 Kilowatt Hour 50000 200000 150000 Engineering changes notices 13 5 2 Indirect production cost Material handling 8000 Engineering 20000 Power 16000 Total Indirect Production cost 44000 1 Cordless Phone SA 2 SA 5 SA 9 Total Material Handling 1290.323 258.0645 6451.613 8000 Engineering 13000 5000 2000 20000 Power 2000 8000 6000 16000 Total 16290.32 13258.06 14451.61 44000 2 Cordless Phone SA 2 SA 5 SA 9 Total Indirect cost 22000 5500 16500 44000 3 Activity based costing provides more reliable and accurte view of product cost.Acivity based costing estimates every activity used for manufacturing a particular product instead of using single per unit criteia like on the basis of direct labour cost, so (1) method is more reliable than (2).