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 115,000 units of the Sport model and 47,500 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 20 percent.

Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility

Cost Driver Volume
Activity Cost Driver Sport Pro Total
Assembly building
Assembling Machine-hours 7,500 31,500 39,000
Setting up machines Setup hours 55 550 605
Handling material Production runs 23 55 78
Packaging building
Inspecting and packing Direct labor-hours 66,000 25,800 91,800
Shipping Number of shipments 115 230 345

Third Quarter Unit Cost Report, Activity-Based Costing—CenterPoint Manufacturing Facility

Sport Pro
Direct material $ 1,515,000 $ 2,430,000
Direct labor
Assembly $ 765,000 $ 630,000
Packaging 1,005,000 390,000
Total direct labor $ 1,770,000 $ 1,020,000
Direct costs $ 3,285,000 $ 3,450,000
Overhead
Assembly building
Assembling (@ $30 per MH) $ 225,000 $ 945,000
Setting up machine (@ $900 per setup hour) 49,500 495,000
Handling material (@ $3,000 per run) 69,000 165,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour) 330,000 129,000
Shipping (@ $1,320 per shipment) 151,800 303,600
Total ABC overhead $ 825,300 $ 2,037,600
Total ABC cost $ 4,110,300 $ 5,487,600
Number of units 115,000 47,500
Unit cost $ 35.74 $ 115.53

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.

Model Total ABC Overhead
Sport
Pro

Homework Answers

Answer #1

Requirement a:

Amount of overhead allocated to the Sport and Pro for the first quarter

Particulars $ $
Overheads allocated in Quarter 3 825,300 2,037,600
Less: Setup cost in Quarter 3 49,500 495,000
Overheads allocated in Quarter 1 excluding setup cost 775,800 1,542,600
Add: Setup cost in Quarter 1 39,600 396,000
Overhead cost allocated in Quarter 1 815,400 1,938,600

Working Notes:

Setup Cost in Quarter 1

Particulars Sport Pro
Existing Setup hours 55 550
Less: Savings due to efficiency (55 * 20%) (550 * 20%) 11 110
New Setup hours 44 440
x Cost per setup hour (44 * $900) (440 * $900) $39,600 $396,000

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