Chapter 17, Problem 14E

Exerciser 17-14 Activity-based costing P3 A2

Glassworks inc. products two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following darte.

	Rounded Edge	Squared Edge	Total
Direct materials	$ 19,000	$ 43,200	$ 62,200
Direct labor	12,200	23,800	36,000
Overhead (300% of direct cost))	36,600	71,400	108,000
Total cost	$ 67,800	$ 138,400	$206,200
Quantity produced	10,500 ft.	14,100 ft.
Average cost per ft. (rounded)	$ 6.46	$ 9.82

Glasswork’s controller wishes to apply activity-based costing (ABC) to allocate the $108,000 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly form that reported above. She has collected the following information.

Overhead cost category (Activity cost Pool)	Cost
Supervision	$ 5,400
Depreciation of machinery	56,600
Assembly line preparation	46,000
Total overhead	$ 108,000

She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines.

Overhead cost Category

(Activity Cost Pool)DriverUsage Rounded Edge Squared Edge Total Supervision Direct labor cost ($) $ 12,200 $ 23,80 $ 36,000 Depreciation of machinery Machine hours 500 hours 1,500 hours 2,000 hours Assembly line preparation Setups (number) 40 times 210 times 250 times

Required

1. Assign these three overhead cost pools to each of the two products using ABC.
2. Determine average cost per foot for each of the two products using ABC.
Check (2) Rounded edge. $5.19; Squared edge, $10.76

3. Compare the average cost per foot under ABC with the average cost pr foot under the current method for each product. Explain why a difference between the two cost allocation method exists.