Question

2.Appleby Manufacturing uses an activity-based costing system. The company produces Model F and Model G. Information relating to the two products is as follows : Model F Model G Units produced 24,000 30,000 Machine hours 7,500 8,500 Direct labor hours 8,000 12,000 Material handling (number of moves) 4,000 6,000 Setups 5,000 7,000 Purchase orders 30 40 Inspections 10,000 14,000 Product line variations 8 12 The following overhead costs are reported for the following activities of the production process: Material handling $ 40,000 Labor-related overhead 120,000 Setups 60,000 Product design 100,000 Batch inspections 120,000 Central purchasing 70,000 Appleby Manufacturing has used activity-based costing to assign costs to Models F and G as given in the table below: Activity Cost Pool Driver Pool Rate Model F Activity Model F Cost Model G Activity Model G Cost Total Material handling $40,000 10,000 $4 4,000 $16,000 6,000 $24,000 $40,000 Labor related overhead $120,000 20,000 $6 8,000 $48,000 12,000 $72,000 $120,000 Setups $60,000 12,000 $5 5,000 $25,000 7,000 $35,000 $60,000 Product design $100,000 20 $5,000 8 $40,000 12 $60,000 $100,000 Batch inspections $120,000 24,000 $5 10,000 $50,000 14,000 $70,000 $120,000 Central purchasing $70,000 70 $1,000 30 $30,000 40 $40,000 $70,000 Total $209,000 $301,000 $510,000 Appleby Manufacturing wants to implement an approximately relevant ABC system by using the two most expensive activities for cost assignment.

Under this new approach using the new rates, what labor cost is assigned to Model F in this approximately relevant ABC system?

Answer 1

Ans. :- Labour cost assigned to Model F under new approach = $102,000

working Notes:-

• Most expensive activities :-

Here, two most expensive activities shall be:

1. Labour related overhead ($120,000)
2. Batch inspection ($120,000)

• Hence, under new approach, total overhead cost of $510,000 shall be assigned in ratio of two most expensive activities costs i.e. 120,000 : 120,000 = 1: 1

• Assignment of costs using Approximately Relevant Activity Based Costing:

  Activity	Total cost assigned
  Labour related overhead	$255,000
  Batch inspection	$255,000
  Total overhead costs	$510,000

Cost assigned to Model F under new approach using new rates :-

Activity	Cost poll	Driver	Pool rate	Model F activity	Model F cost
Labour related overhead	$255,000	20000	$13	8000	$102,000
Batch inspection	$255,000	24000	$11	10000	$106,250