Question

After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Santana found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.

Activity		Cost		Driver
Setting up machines	$	18,750		25	batches
Inspecting components	$	5,200		5,200	parts
Providing utilities	$	10,400		5,200	machine hours

Overhead has been applied to output at a rate of 40% of direct labor costs. The following data pertain to Job 615.

Direct materials	$	3,000
Direct labor	$	3,700
Batches		2	batches
Number of parts		470	parts
Machine hours		700	machine hours

Required:
1. Classify each of its three overhead activities as unit level, batch level, product level, or facility level.
  

2. What is the total cost of Job 615 if Business Solutions applies overhead at 40% of direct labor cost?
  

3. What is the total cost of Job 615 if Business Solutions uses activity-based costing?
  

Answer 1

Answer:
1)
Setting up machines	Batch level
Inspecting components	Unit level
Providing utilities	Facility level
2)
Particulars	Amount (in $ )
Direct materials	$ 3,000
Direct labor	$ 3,700
Overhead applied ( $ 3,700 x 40%)	$ 1,480
Total Cost	$ 8,180
3)
Particulars	Amount (in $ )
Direct materials	$ 3,000
Direct labor	$ 3,700
Overhead applied :
Setting up machines ( $ 18,750 / 25 ) x 2	$ 1,500
Inspecting components ( $ 5,200 / 5,200 ) x 470	$ 470
Providing utilities ( $ 10,400 / 5,200 ) x 700	$ 1,400
Total manufacturing Cost	$ 10,070