Baja Industries has recently switched its method of applying manufacturing overhead from a single predetermined overhead rate based on direct labor hours to activity-based costing (ABC). Assume that the direct labor rate is $18.00 per hour and that there were no beginning inventories. The following cost drivers and rates have been developed for allocating manufacturing overhead costs: Activity Cost Driver Rate Material handling Number of parts used $ 2.00 per part Assembly and inspection Number of direct labor hours $25.00 per DLH Testing Number of units tested $ 5.00 per unit The following production, costs, and activities occurred during the month of August: Direct Number of Units Produced Material Cost Parts Used Direct Labor Hours 6,400 $208,600 142,000 26,480 (a.) Calculate the total manufacturing cost and the cost per unit for the month of August. (b.) Assume instead that Baja Industries applies manufacturing overhead on the basis of $40.00 per direct labor hours (rather than the ABC method). Calculate the total manufacturing overhead cost applied for the month of August. (c.) Which method of applying overhead do you think provides better information for manufacturing managers?
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.
- Baja Industries has recently switched its method of applying manufacturing
overhead from a single predetermined overhead rate based on direct labor hours to activity-based costing (ABC). Assume that the direct labor rate is $18.00 per hour and that there were no beginning inventories. The following cost drivers and rates have been developed for allocating manufacturing overhead costs:
Activity Cost Driver Rate
Material handling Number of parts used $ 2.00 per part
Assembly and inspection Number of direct labor hours $25.00 per DLH
Testing Number of units tested $ 5.00 per unit
The following production, costs, and activities occurred during the month of August:
Direct Number of
Units Produced Material Cost Parts Used Direct Labor Hours
6,400 $208,600 142,000 26,480
(a.) Calculate the totalmanufacturing cost and the cost per unit for the month of August.
(b.) Assume instead that Baja Industries applies manufacturing overhead on the basis of $40.00 per
direct labor hours (rather than the ABC method). Calculate the total manufacturing overhead
cost applied for the month of August.
(c.) Which method of applying overhead do you think provides better information for manufacturing
managers?
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