Question

Drilling Company uses activity-based costing and provides this information:

Manufacturing Activity	Cost Driver	Driver Rate
Materials handling	Number of parts	$	0.3
Machinery	Number of machine hours		56
Assembly	Number of parts		3.10
Inspection	Number of finished units		35

Drilling has just completed 85 units of a component for a customer. Each unit required 105 parts and 3.25 machine hours. The prime cost is $1,350 per finished unit. All other manufacturing costs are classified as manufacturing overhead.

Required:

1. Compute the total manufacturing costs and the unit costs of the 85 units just completed using ABC costing.

2. In addition to the manufacturing costs, the firm has determined that the total cost of upstream activities, including research and development and product design, is $185 per unit. The total cost of downstream activities, such as distribution, marketing, and customer service, is $305 per unit. Compute the full product cost per unit, including upstream, manufacturing, and downstream activities. Also compute the relative proportion of each main cost category.

Answer 1

1.Total manufacturing costs and the unit costs of 85 units:

Prime costs	85 x $1350	$114,750
Manufacturing overheads:
Material handling	85 x 105 x $0.3	$2677.5
Machinery	85 x 3.25 x $56	$15,470
Assembly	85 x 105 x $3.10	$27667.5
Inspection	85 x $35	$2975
Total manufacturing costs		$163,540
No.of units		85
Cost per unit	163540 / 85	$1924

2.Full product cost per unit, including upstream, manufacturing, and downstream activities:

Particulars	Amount	Relative proportion
Upstream activities	$185	185 / 2414 x 100 = 7.66%
Manufacturing costs	$1924	1924 / 2414 x 100 = 79.71%
Downstream activities	$305	305 / 2414 x 100 = 12.63%
Full product cost per unit	$2414	100%