Use ABC to allocate manufacturing overhead (Learning Objective 2)

Several years after reengineering its production process, Enke Corp. hired a new con¬ troller, Natalie Babin. She developed an ABC system very similar to the one used by Enke’s chief rival, Northstar. Part of the reason Babin developed the ABC system was because Enke’s profits had been declining even though the company had shifted its product mix toward the product that had appeared most profitable under the old sys¬ tem. Before adopting the new ABC system, Enke had used a plantwide overhead rate based on direct labor hours that was developed years ago.

For 2007, Enke’s budgeted ABC manufacturing overhead allocation rates are:

The number of parts is now a feasible allocation base because Enke recently pur¬ chased bar-coding technology. Enke produces two wheel models: standard and deluxe. Budgeted data for 2007 are as follows:

The company’s managers expect to produce 1,000 units of each model during the year.
Requirements 1. Compute the total budgeted manufacturing overhead cost for 2007.
2. Compute the manufacturing overhead cost per wheel of each model using ABC.
3. Compute Enke’s traditional plantwide overhead rate. Use this rate to determine the manufacturing overhead cost per wheel under the traditional system.

Transcribed Image Text:

Activity Allocation Base Materials handling Number of parts Machine setup Insertion of parts Finishing Number of setups Activity Cost Allocation Rate $ 3.75 per part 300.00 per setup Number of parts 24.00 per part Finishing direct labor hours 50.00 per hour