2. The job costing system at Sheri\'s Custom Framing has five indirect cost pool

Question

2. The job costing system at Sheri's Custom Framing has five indirect cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs: Job 215, an order of 15 intricate personalized frames, and Job 325, an order of 6 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job-costing system and a newly designed activity based job-costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows Budgeted Overhead Actvity Driv Budgeted Quantity of Activity Driver Purchasing S35,000 Purchase orders 2,000 Material handling Machine maintenance Product inspection Packaging 5,000 10,500 1,200 3,800 43,750 Material moves 118,650 Machine-hours 9,450 Inspections 19,950 Units produced S226,800 Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325 Job 215 Job 325 25 8 Number of purchase orders Number of material moves Machine-hours Number of inspections Units produced 10 40 60 15 a. Compute total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours b. Compute total overhead allocated to each job under an activity-based costing system using the appropriate activity

Explanation / Answer

Solution:

Part a --- Total overhead allocated to each job using simple costing system

Under simple costing system, an overhead rate is calculated by using total Overhead cost and total allocation base.

Here allocation base is Machine Hours. So the total machine hours = 10,500 Hours

Total manufacturing overhead = $226,800

Overhead Rate = Total Overhead Cost $226,800 / Total Machine Hours 10,500 = $21.60 per machine hour

Now, the total overhead allocated to each job as follows:

Job 215

Job 315

Machine Hours

40

60

Overhead Rate per MH

$21.60

$21.60

Total Allocated Overhead

$864

(40*21.60)

$1,296

(60*21.60)

Part b – Total Overhead Allocated to each job using ABC Costing

Activity Based Costing System

- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.

- This system determines all the activities related to product or production process.

- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.

- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.

- It helps to distribution of overheads on the basis of activities.

The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)

So, first of all we calculate activity rate and then allocate the overhead using the actual usage of activity by each job

Job 215

Job 325

Activity Cost Pool

Expected Manufacturing Overhead Costs (A)

Expected Activity Cost Driver (B)

Activity Rate (C = A/B)

Activity Driver USAGE (H)

Overhead Assigned (C*H)

Activity Driver USAGE (E)

Overhead Assigned (C*E)

Purchasing

$35,000

2000

Purchase Orders

$17.50

per purchase order

25

$437.50

8

$140.00

Material Handling

$43,750

5,000

Material moves

$8.75

per move

10

$87.50

4

$35.00

Machine maintenance

$118,650

10500

Machine Hours

$11.30

per machine hour

40

$452.00

60

$678.00

Product Inspection

$9,450

1200

Inspections

$7.88

per inspection

9

$70.88

3

$23.63

Packaging

$19,950

3800

Units Produced

$5.25

per unit produced

15

$78.75

6

$31.50

$226,800

$1,126.63

$908.13

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Job 215

Job 315

Machine Hours

40

60

Overhead Rate per MH

$21.60

$21.60

Total Allocated Overhead

$864

(40*21.60)

$1,296

(60*21.60)

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