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|
|Setting up machines||Setup hours||55||550||605|
|Handling material||Production runs||23||55||78|
|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
|Total direct labor||$||1,770,000||$||1,020,000|
|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|
|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|
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.
Amount of overhead allocated to the Sport and Pro for the first quarter
|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|
Setup Cost in Quarter 1
|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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