Chapter 4, Problem 4.21AE

Apply activity cost allocation rates (Learning Objective 2)

SUSTAINABILITY

Holiday Industries manufactures a variety of custom products. The company has traditionally used a plantwide manufacturing overhead rate based on machine hours to allocate manufacturing overhead to its products. The company estimates that it will incur $970,000 in total manufacturing overhead costs in the upcoming year and will use 10,000 machine hours.

Up to this point, hazardous waste disposal fees have been absorbed into the plantwide manufacturing overhead rate and allocated to all products as part of the manufacturing overhead process. Recently, the company has been experiencing significantly increased waste-disposal fees for hazardous waste generated by certain products, and as a result, profit margins on all products have been negatively impacted. Company management wants to implement an activity-based costing system so that managers know the cost of each product, including its hazardous waste disposal costs.

Expected usage and costs for manufacturing overhead activities for the upcoming year are as follows:

During the year, Job 356 is started and completed. Usage for this job follows:

290 pounds of direct materials at $35 per pound

20 direct labor hours used at $20 per labor hour

60 machine hours used

9 change orders

60 pounds of hazardous waste generated

Requirements

1. 1. Calculate the cost of Job 356 using the traditional plantwide manufacturing overhead rate based on machine hours.
2. 2. Calculate the cost of Job 356 using activity-based costing.
3. 3. If you were a manager, which cost estimate would provide you more useful information? How might you use this information?