Question

After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing...

After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 110,000 units of the Sport model and 45,000 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 35 percent.
Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility
Cost Driver Volume
Activity
Cost Driver
Sport
Pro
Total
Assembly building
Assembling
Machine-hours
7,000
31,000
38,000
Setting up machines
Setup hours
50
500
550
Handling material
Production runs
18
50
68
Packaging building
Inspecting and packing
Direct labor-hours
64,000
24,800
88,800
Shipping
Nmber of shipments
110
220
330
Third Quarter Unit Cost Report, Activity-Based Costing—CenterPoint Manufacturing Facility
Sport Pro
Direct material $1,510,000 $2,420,000
Direct labor
Assembly
$ 760,000
Packaging
1,000,000
Total direct labor
$1,760,000
Direct costs
$3,270,000
Overhead
Assembly building
Assembling (@ $30 per MH)
$ 210,000
Setting up machine (@$900 per setup hour)
45,000
Handling material (@ $3,000 per run)
54,000
Packaging building
Inspecting and packing (@$5 per direct labor-hour)
320,000
Shipping (@ $1,320 per shipment)
145,200
Total ABC overhead
$ 774,200
Total ABC cost
$4,044,200
Number of units
110,000
Unit cost
$ 36.77
$ 620,000 380,000 $1,000,000 $3,420,000
$ 930,000
450,000
150,000
124,000
290,400
$1,944,400
$5,364,400
45,000
$ 119.21
Required:
a. Compute the amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900.

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