Question

# Oxnard Company uses a volume-based costing system that applies overhead cost based on machine hours at...

Oxnard Company uses a volume-based costing system that applies overhead cost based on machine hours at \$25 per machine hour.

The company is considering adopting an activity-based costing system with the following data:

 Activity Cost Driver Rate Materials handling Pounds of material \$1.50 Lathe work Number of parts \$1.00 Milling Number of machine hours \$8.00 Grinding Number of turns \$0.40 Testing Number of units tested \$15.00

The two jobs processed in the month of May had the following characteristics:

 Job A Job B Direct material \$18,400 \$60,600 Direct labor \$6,000 \$12,000 Pounds of material 900 3,000 Number of parts 450 1,500 Number of turns 10,000 40,000 Number of machine hours 375 800 Number of units in each job 80 200

All units tested.

Q. The difference in total cost between ABC and the volume-based costing system for Job B is:

\$11,400

\$20,000

\$5,000

\$69,600

Calculation:

Total Cost for Job B ads per Volume-Based Costing System =

Direct Material + Direct Labor + Overhead Cost

= 60,600 + 12,000 + (800 * 25)

= \$92,600

Total Cost for Job B as per Activity Based Costing System:

Statement showing computation of Total Cost of Job B as per ABC System

 Cost Driver (including figure) Rate (\$) Amount (\$) Direct Material Direct Labor Materials Handling Lathe Work Milling Grinding Testing - - Pounds of Material (3000) Number of Parts (1500) Number of Machine Hours (800) Number of Turns (40000) Number of Units Tested (200*) - - 1.50 1.00 8.00 0.40 15.00 60,600 12,000 4,500 1,500 6,400 16,000 3,000 Total Cost - - \$104,000

* Since all units are tested, number of units tested will be equal to number of units in the job. Number of units in the job = 200 units

Difference = 104,000 - 92,600

= \$11,400