Baja Industries has recently switched its method of applying manufacturing overh

Question

Baja Industries has recently switched its method of applying manufacturing overhead from a single predetermined overhead rate based on direct labor hours to activity-based costing (ABC). Assume that the direct labor rate is $18.00 per hour and that there were no beginning inventories. The following cost drivers and rates have been developed for allocating manufacturing overhead costs:

  Activity Cost Driver Rate
Material handling Number of parts used $2.00 per part
Assembly and inspection Number of direct labor hours $25.00 per DLH
Testing Number of units tested $5.00 per unit

The following production, costs, and activities occurred during the month of August:

      Direct Number of
Units Produced   Material Cost Parts Used   Direct Labor Hours
6,400 $208,600 142,000 26,480

(a.) Calculate the total manufacturing cost and the cost per unit for the month of August.
(b.) Assume instead that Baja Industries applies manufacturing overhead on the basis of $40.00 per direct labor hours (rather than the ABC method). Calculate the total manufacturing overhead cost applied for the month of August.
(c.) Which method of applying overhead do you think provides better information for manufacturing managers?

Explanation / Answer

1.

b. total manufacturing overhead cost applied

= $40 x 26480 = $1059200

c. Activity based costing is better method.

Direct material cost $208600 Direct labor cost (26480 x $18) 476640 Manufacturing overhead: Material handling ($2 x 142000) 284000 Assembly and Inspection ($25 x 26480) 662000 Testing ($5 x 6400) 32000 978000 Total manufacturing cost $1663240 No. of units 6400 Cost per unit $259.88125

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