College Supply Company (CSC) makes three types of drinking glasses: short, mediu
ID: 2537650 • Letter: C
Question
College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center Recommended Cost Driver Estimated Cost Driver Units Estimated Cost Activity Setting up production Processing orders Handling materials Using machines Providing quality management Packing and shipping Number of production runs Number of orders Pounds of materials Machine-hours Number of inspections Units shipped $ 28,000 43,200 14,000 54,000 56,000 42,000 $237,200 100 runs 180 orders 7,000 pounds 9,000 hours 40 inspections 21,000 units In addition, management estimated 2,000 direct labor-hours for year 5Explanation / Answer
a) Calculation of allocation rate for each activity (Amount in $)
b) Calculation of production costs (Amount in $)
Workings:
For calculating labor and overhead cost, labor hours of each product is multiplied by direct labor hour rate of $22 per hour and Predetermined overhead rate of $118.60 per hour (as calculated in a) respectively.
c) Calculation of production cost based on ABC costing (Amount in $)
Workings:
Activity cost for each product is calculated by multiplying allocation rate of each activity with their respective usage of that activity.
Activity Estimated Cost (A) Estimated Cost Driver Units (B) Allocation rate (A/B) Setting up production 28,000 100 runs 28,000/100 = $280 per run Processing orders 43,200 180 orders 43,200/180 = $240 per order Handling materials 14,000 7,000 pounds 14,000/7,000 = $2 per lb. Using machines 54,000 9,000 hours 54,000/9,000 = $6 per hour Performing quality management 56,000 40 inspections 56,000/40 = $1,400 per insp. Packing and Shipping 42,000 21,000 units 42,000/21,000 = $2 per unit Direct Labor hour rate 237,200 2,000 hours 237,200/2,000 = $118.60 per hour