Telecom Company would like to use activity-based costing to allocate overhead, r

Question

Telecom Company would like to use activity-based costing to allocate overhead, rather than using one plant-wide rate. The company produced 6,000 cell phones (sells for dollar 150) and 2,000 smart phones (sells for dollar 350). The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs Required: What is the overhead cost per unit, for each type of phone? Why would the company choose to use activity based costing over a predetermined OH rate? What could the company use this information for?

Explanation / Answer

Estimated overhead Cell phone Smart phone Total                 Cost allocated cost Cell phone Smart phone Production runs 200000 20 5 25 160000 40000 Quality inspections 150000 600 1400 2000 45000 105000 Packaging Dept 200000 6000 2000 8000 150000 50000 Total 355000 195000 Number of units sold 6000 2000 Cost allocation = estimated overhead * estimated cost driver activity /total cost driver activity a) Overhead cost per unit Cell phone = Total overhead cost allocated / Number of units sold                         = 355000 / 6000                        = 59.17 Smart phone = 195000 / 2000                            = 97.5 b) Th company will use ABC system as it is more accurate than predetermined overhead rate system because they provide a more precise breakdown of indirect costs The overhead costs are allocated on the basis of their usage and hence is more accurate and correct c) This information will be used by the company in determining the correct manufacturing overhead costs of each product This would be used in correctly estimating the total cost of the product and consequentle the correct margin on each product

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