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.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Exercise 9-37 (Static) Activity-Based Costing (LO 9-4, 5)
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 100,000 units of the Sport model and 40,000 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 25 percent.
Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility
| Cost Driver Volume | ||||
| Activity | Cost Driver | Sport | Pro | Total |
| Assembly building | ||||
| Assembling | Machine-hours | 6,000 | 30,000 | 36,000 |
| Setting up machines | Setup hours | 40 | 400 | 440 |
| Handling material | Production runs | 8 | 40 | 48 |
| Packaging building | ||||
| Inspecting and packing | Direct labor-hours | 60,000 | 22,800 | 82,800 |
| Shipping | Number of shipments | 100 | 200 | 300 |
Third Quarter Unit Cost Report, Activity-Based Costing—CenterPoint Manufacturing Facility
| Sport | Pro | ||||||
| Direct material | $ | 1,500,000 | $ | 2,400,000 | |||
| Direct labor | |||||||
| Assembly | $ | 750,000 | $ | 600,000 | |||
| Packaging | 990,000 | 360,000 | |||||
| Total direct labor | $ | 1,740,000 | $ | 960,000 | |||
| Direct costs | $ | 3,240,000 | $ | 3,360,000 | |||
| Assembly building | |||||||
| Assembling (@ $30 per MH) | $ | 180,000 | $ | 900,000 | |||
| Setting up machine (@ $900 per setup hour) | 36,000 | 360,000 | |||||
| Handling material (@ $3,000 per run) | 24,000 | 120,000 | |||||
| Packaging building | |||||||
| Inspecting and packing (@ $5 per direct labor-hour) | 300,000 | 114,000 | |||||
| Shipping (@ $1,320 per shipment) | 132,000 | 264,000 | |||||
| Total ABC overhead | $ | 672,000 | $ | 1,758,000 | |||
| Total ABC cost | $ | 3,912,000 | $ | 5,118,000 | |||
| Number of units | 100,000 | 40,000 | |||||
| Unit cost | $ | 39.12 | $ | 127.95 | |||
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.
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