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 109,000 units of the Sport model and 44,500 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 34 percent.

Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility

		Cost Driver Volume
Activity	Cost Driver	Sport	Pro	Total
Assembly building
Assembling	Machine-hours	6,900	30,900	37,800
Setting up machines	Setup hours	49	490	539
Handling material	Production runs	17	49	66
Packaging building
Inspecting and packing	Direct labor-hours	63,600	24,600	88,200
Shipping	Number of shipments	109	218	327

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

	Sport				Pro
Direct material	$	1,509,000			$	2,418,000
Direct labor
Assembly	$	759,000			$	618,000
Packaging		999,000				378,000
Total direct labor	$	1,758,000			$	996,000
Direct costs	$	3,267,000			$	3,414,000
Overhead
Assembly building
Assembling (@ $30 per MH)	$	207,000			$	927,000
Setting up machine (@ $900 per setup hour)		44,100				441,000
Handling material (@ $3,000 per run)		51,000				147,000
Packaging building
Inspecting and packing (@ $5 per direct labor-hour)		318,000				123,000
Shipping (@ $1,320 per shipment)		143,880				287,760
Total ABC overhead	$	763,980			$	1,925,760
Total ABC cost	$	4,030,980			$	5,339,760
Number of units		109,000				44,500
Unit cost	$	36.98			$	119.99

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.

Sport Model: Total ABC Overhead?

Pro Model: Total ABC Overhead?

Answer 1