Question

Assume that Panasonic Company has determined its estimated total manufacturing overhead cost for one of its plants to be $636,400, consisting of the following activity cost pools for the current month:

Activity Centers Activity Costs

Assembly setups 132,000

Materials handling 64,800

Assembly 360,000

Maintenance 79,600

Total: 206,700

Cost Drivers Activity Level

Setup hours 2,000

Number of moves 600

Assembly hours 18,000

Maintenance hours 1,990

Total direct labor hours used during the month were 14,800. Panasonic produces many different electronic products, including the following two products produced during the current month.

Model X301 Model Z205

Units produced $2,000 $2,000

Direct materials costs $27,000 $27,000

Direct labor costs $22,000 $22,000

Direct labor hours 700 700

Setup hours 60 120

Materials moves 25 50

Assembly hours 900 900

Maintenance hours 20 80

Calculate the total per unit cost of each model using direct labor hours to assign manufacturing overhead to products.

Calculate the total per-unit cost of each model using activity-based costing to assign manufacturing overhead to products.

Comment on the accuracy of the two methods for determining product costs.

Discuss some of the strategic implications of your answers to the previous requirements.

Answer 1

Comment:

The product cost determined based on activity-based costing system as in the ABC system the allocations made are on the basis of each and every level instead of a balloon rate based on direct labor hours. It allocated all the manufacturing overhead costs based on each type of activity level for both of the products. Therefore, the ABC system provides more accurate product costs.

Strategic Implications:

• The overhead allocations based on ABC system can be used to determine which of the activities are inefficient where the work is done efficiently.
• How many hours are used in each type of activity and how it can be reduced further to achieve a higher level of efficiency.
• Variances in the budgeted and actual overhead costs can also be analyzed in a better sense.