Activity Recommended Cost Driver Annual Costs
SuperClassABC and predetermined overhead rates. Assume that SunSpecs Corporation makes three types of sunglasses, Razors, Slims, and Eagles, for major retailers such as Ray-Ban and Gucci. SunSpecs presently applies overhead using a predetermined rate based on direct labor hours. A consultant recommended that SunSpecs switch to activity-based costing. Manage- ment decided to give ABC a try and identified the following activities, cost drivers, and estimated costs for Year 2 for each activity center.
Estimated
Activity Recommended Cost Driver
Annual Costs
Annual
Cost Driver Units
Production Setup | Number of Production Runs | $ 60,000 | 200 |
Order Processing | Number of Orders | 100,000 | 400 |
Materials Handling | Pounds of Materials Used | 40,000 | 16,000 |
Equipment Depreciation and Maintenance | Machine Hours | 120,000 | 20,000 |
Quality Management | Number of Inspections | 100,000 | 800 |
Packing and Shipping | Number of Units Shipped | 80,000 | 80,000 |
Total Estimated Overhead .................................................................................. $500,000
The company estimated 10,000 labor hours would be worked in Year 2. Assume the following activities occurred in February of Year 2:
Razors | Slims | Eagles | |
Number of Units Produced ............................................................... | 3,000 | 2,000 | 1,000 |
Direct Materials Costs ........................................................................ | $8,000 | $5,000 | $4,000 |
Direct Labor Hours ............................................................................. | 400 | 300 | 174 |
Number of Production Runs ............................................................. | 2 | 4 | 12 |
Number of Orders ................................................................................ | 16 | 16 | 8 |
Pounds of Material Used ................................................................... | 800 | 400 | 400 |
Machine Hours ..................................................................................... | 800 | 400 | 400 |
Number of Inspections ...................................................................... | 20 | 20 | 20 |
Units Shipped ...................................................................................... | 3,000 | 2,000 | 1,000 |
Direct labor costs are $20 per hour ................................................ | $8,000 | $6,000 | $3,480 |
Compute an overhead allocation rate for each of the cost drivers recommended by the consultant and for direct labor.
Compute the production costs for each product for February using the cost drivers recommended by the consultant.
Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using only direct labor hours as the allocation base and using activity-based costing. Write a brief response to management, including calculation of product costs using direct labor hours to allocate overhead.
7 years ago
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