Question

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

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

All the best...