Question 12.A.8: Your company manufactures two products, A and B. In one mont...
Your company manufactures two products, A and B. In one month, some 200 of A were produced and 1,000 of B. Overheads were incurred amounting to $250,000. Main activities and cost drivers have been identified as follows:
| Activity | Cost driver | Total cost |
| Stores | Number of orders | 100,000 |
| Machine costs and power | Machine hours | 80,000 |
| Quality control | Number of inspections | 70,000 |
| \underline{\underline{250,000} } |
The cost drivers relating to each product are as shown below:
| Cost driver | Product A | Product B | Total |
| Number of orders | 500 | 1,500 | 2,000 |
| Machine hours | 4,000 | 4,000 | 8,000 |
| Number of inspections | 1,000 | 3,000 | 4,000 |
(a) Calculate the overhead rate for each activity.
(b) Assign the overhead costs for the month to the two products using activity-based costing (ABC).
(c) Explain the benefits of ABC.
Overhead rate for each activity
One order = total cost/number of order = 100,000/2,000 = $50 per order
Machine hour = Total machine costs and power/number of machine hours = 80,000/8,000 = $10 per machine hour
Cost per inspection = Total costs of QC/number of inspection = $70,000/4,000 = $17.50 per inspection
Overheads assigned, as follows:
| Product A | Product B | Total | |
| Number of orders | 500 × $50 = $25,000 | 1,500 × $50 = $75,000 | $100,000 |
| Machine hours | 4,000 × $10 = $40,000 | 4,000 × $10 = $40,000 | $80,000 |
| Inspections | 1,000 × $17.50 = $17,500 | 3,000 × $17.50 = 52,500 | $70,000 |
| Total | $82,500 | $167,500 | $250,000 |
| Per product | $82,500/200 = 412.50 | 167,500/1,000 = 167.50 |