ACCT4210–Cost and Managerial Accounting Problem 4: Activity-based costing Rome,
ID: 2331853 • Letter: A
Question
ACCT4210–Cost and Managerial Accounting
Problem 4: Activity-based costing
Rome, Inc., produces two products, Product A and Product B. If currently allocates overhead costs using direct-labor hours, but the controller has recommended an activity-based costing (ABC) system using the following data:
Activity Level
Activity
Cost-Driver Base
Cost
Product A
Product B
Production setup
Number of setups
$ 90,000
11
19
Materials handling & requisition
Number of parts per unit
$ 15,000
6
18
Packaging & shipping
Number of units shipped
$ 45,000
30,000
60,000
Total overhead
$150,000
a. Compute the amount of overhead to be allocated to each product under ABC. (PLEASE SHOW YOUR WORK)
b.. Should the company follow the controller’s recommendation? Explain your answer.
PLEASE SHOW YOUR WORK
Activity Level
Activity
Cost-Driver Base
Cost
Product A
Product B
Production setup
Number of setups
$ 90,000
11
19
Materials handling & requisition
Number of parts per unit
$ 15,000
6
18
Packaging & shipping
Number of units shipped
$ 45,000
30,000
60,000
Total overhead
$150,000
Explanation / Answer
Answers
--Step 1: Calculation of Activity rate under ABC method---
Activity Level
Activity
Cost-Driver Base
Cost
Product A
Product B
Total Activity Level
Activity rate per cost driver activity
[A]
[B]
[C]
[D = B+C]
[E = A/D]
Production setup
Number of setups
$ 90,000.00
11
19
30
$ 3,000.00
per Number of setups
Materials handling & requisition
Number of parts per unit
$ 15,000.00
6
18
24
$ 625.00
per Number of parts per unit
Packaging & shipping
Number of units shipped
$ 45,000.00
30,000
60,000
90,000
$ 0.50
per Number of units shipped
Total overhead
$ 150,000.00
---Step 2: Allocation of Overhead to PRODUCT A
Activity
Activity rate per cost driver activity
Activity Level for Product A
Overhead Allocated to Product A
[A = calcuated above]
[B]
[C = A x B]
Production setup
$ 3,000.00
per Number of setups
11
$ 33,000.00
Materials handling & requisition
$ 625.00
per Number of parts per unit
6
$ 3,750.00
Packaging & shipping
$ 0.50
per Number of units shipped
30,000
$ 15,000.00
Total Overhead Allocated to Product A
$ 51,750.00
---Step 3: Allocation of Overhead to PRODUCT B
Activity
Activity rate per cost driver activity
Activity Level for Product B
Overhead Allocated to Product B
[A = calculated above]
[B]
[C = A x B]
Production setup
$ 3,000.00
per Number of setups
19
$ 57,000.00
Materials handling & requisition
$ 625.00
per Number of parts per unit
18
$ 11,250.00
Packaging & shipping
$ 0.50
per Number of units shipped
60,000
$ 30,000.00
Total Overhead Allocated to Product B
$ 98,250.00
Product A
Product B
Overheads Allocated as per ABC method
$ 51,750.00
$ 98,250.00
YES, the company should follow the controller’s recommendation of following Activity Based Costing.
This is because:
>Allocating all the overheads just using direct labor hours (as being used currently) as the common base for all the overhead does not feel right because not all overheads are based on direct labor hours.
>Activity Based Costing method is more scientific and accurate and provides results that are actually meaningful for decision making.
Activity Level
Activity
Cost-Driver Base
Cost
Product A
Product B
Total Activity Level
Activity rate per cost driver activity
[A]
[B]
[C]
[D = B+C]
[E = A/D]
Production setup
Number of setups
$ 90,000.00
11
19
30
$ 3,000.00
per Number of setups
Materials handling & requisition
Number of parts per unit
$ 15,000.00
6
18
24
$ 625.00
per Number of parts per unit
Packaging & shipping
Number of units shipped
$ 45,000.00
30,000
60,000
90,000
$ 0.50
per Number of units shipped
Total overhead
$ 150,000.00
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