Sand Castle Manufacturing produces concrete yard art. Recently, 2,500 concrete s

Question

Sand Castle Manufacturing produces concrete yard art. Recently, 2,500 concrete seahorses were produced in a production run. The run required 1,250 machine hours, and also required five "set-ups" of mixing equipment. Final inspection required 50 hours of inspection activity. Overhead is estimated at $30 per machine hour, plus $2,750 per "set-up," and $25 per inspection hour. Direct materials and direct labor total $75 per seahorse. (a) Apply activity-based costing and determine the amount assigned to a concrete seahorse. (b) For GAAP purposes, Sand Castle applies traditional costing methods, and allocates overhead at $50 per machine hour. How much cost would be assigned to the 2,500 seahorses? What is the per unit cost of a seahorse under the traditional approach? What might explain the higher cost assignment, and how could this influence business decision making? Sand Castle Manufacturing produces concrete yard art. Recently, 2,500 concrete seahorses were produced in a production run. The run required 1,250 machine hours, and also required five "set-ups" of mixing equipment. Final inspection required 50 hours of inspection activity. Overhead is estimated at $30 per machine hour, plus $2,750 per "set-up," and $25 per inspection hour. Direct materials and direct labor total $75 per seahorse. (a) Apply activity-based costing and determine the amount assigned to a concrete seahorse. (b) For GAAP purposes, Sand Castle applies traditional costing methods, and allocates overhead at $50 per machine hour. How much cost would be assigned to the 2,500 seahorses? What is the per unit cost of a seahorse under the traditional approach? What might explain the higher cost assignment, and how could this influence business decision making?

Explanation / Answer

Answer 1 Amount assigned to Concrete seahorse under Activity based costing Overhead cost = Total machine hours * $30 per machine hour = 1250 hours * $30 = $37500 Machine set up cost = No.of setups * $2750 per setup = 5 * 2750 = $13750 Inspection cost = Inspection hours * $25 per hour = 50 * 25 = $1250 Total overhead cost assigned to Concrete Seahorse = $37500 + $13750 + $1250 = $52500 Answer 2 Total overhead cost assigned to Concrete Seahorse under traditional costing = 1250 hours * $50 = $62500 Unit cost of Seahorse under traditional costing = $62500 / 2500 units = $25 per seahorse Traditional costing leads to higher overhead cost assignement to product compared to ABC costing. To make or not to make a product decision will certainly get affected if we follow either of the costing system.

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