Chapter 13, Problem 13.22P

To determine

Concept Introduction:

Activity Based Costing (ABC):

ABC costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike traditional method, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.

Predetermined Overhead allocation rate:

The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.

The formula to calculate the Predetermined Overhead allocation rate is as follows:

  $PredeterminedOverheadallocationrate=\frac{TotalEstimatedoverheadcost}{TotalEstimatedallocationbase}$

Requirement-a:

To Calculate:

The Total Manufacturing cost and Cost per unit produced during the month using the Activity Based Costing

Answer to Problem 13.22P

The Total Manufacturing cost and Cost per unit produced during the month using the Activity Based Costing are as follows:

Total Manufacturing cost	$ 679,040
Cost per unit	$ 212.20

Explanation of Solution

The Total Manufacturing cost and Cost per unit produced during the month using the Activity Based Costing are calculated as follows:

Direct Material Cost	$ 107,200
Direct Labor Cost (13120 hours *$15)	$ 196,800
Overhead Costs:
Materials handling (70400 parts * $0.20)	$ 14,080
Cutting and leather work (70400 parts * $1.40)	$ 98,560
Assembly and inspection (13120 hours *$20)	$ 262,400
Total Manufacturing cost	$ 679,040
Cost per unit ($679040/3200 Units)	$ 212.20

To determine

Concept Introduction:

Activity Based Costing (ABC):

ABC costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike traditional method, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.

Predetermined Overhead allocation rate:

The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.

The formula to calculate the Predetermined Overhead allocation rate is as follows:

  $PredeterminedOverheadallocationrate=\frac{TotalEstimatedoverheadcost}{TotalEstimatedallocationbase}$

Requirement-b:

To Calculate:

The Total Manufacturing cost and Cost per unit produced during the month using the predetermined overhead allocation rate

Answer to Problem 13.22P

The Total Manufacturing cost and Cost per unit produced during the month using the predetermined overhead allocation rate are as follows:

Total Manufacturing cost	$ 697,600
Cost per unit	$ 218.00

Explanation of Solution

The Total Manufacturing cost and Cost per unit produced during the month using the predetermined overhead allocation rate are calculated as follows:

Direct Material Cost	$ 107,200
Direct Labor Cost (13120 hours *$15)	$ 196,800
Overhead Costs (13120 hours *$30)	$ 393,600
Total Manufacturing cost	$ 697,600
Cost per unit ($679040/3200 Units)	$ 218.00
Note: Calculation of Predetermined Overhead allocation Rate:
Total Overhead Costs (250000+1750000+4000000) (A)	$ 6,000,000
Total Direct Labor hours (B)	200,000
Predetermined Overhead allocation Rate = A/B =	$ 30

To determine

Concept Introduction:

Activity Based Costing (ABC):

ABC costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike traditional method, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.

Predetermined Overhead allocation rate:

The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.

The formula to calculate the Predetermined Overhead allocation rate is as follows:

  $PredeterminedOverheadallocationrate=\frac{TotalEstimatedoverheadcost}{TotalEstimatedallocationbase}$

Requirement-c:

To Compare:

The Total Manufacturing cost and Cost per unit produced during the month calculated using the activity based and costing and using the predetermined overhead allocation rate

Answer to Problem 13.22P

ABC costing method does not use the plant wide overhead rate, rather it uses different allocation rate for different production activity, which results in fair calculation of the cost per unit of the product.

Explanation of Solution

The Total Manufacturing cost and Cost per unit produced during the month using the Activity Based Costing are as follows:

Total Manufacturing cost	$ 679,040
Cost per unit	$ 212.20

The Total Manufacturing cost and Cost per unit produced during the month using the predetermined overhead allocation rate are as follows:

Total Manufacturing cost	$ 697,600
Cost per unit	$ 218.00

The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.

ABC costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike traditional method, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.

Hence, ABC costing method does not use the plant wide overhead rate, rather it uses different allocation rate for different production activity, which results in fair calculation of the cost per unit of the product.