1. Activity Based Costing

Richards Company produces two products. One is an all-purpose widget known as Generic or G. The other is more complex and is called Specialty or S. Estimated output and cost estimates for the current or upcoming year are as follows:

Product G: 40,000 units calling for $15 DM cost and 2 hours of DL for each unit.

Product S: 15,000 units calling for $25 DM cost and 5 hours of DL for each unit.

The average direct labor rate for Richards is $10 per hour. Richards estimates is Mfg. O/H costs for the year to total $1,200,000, and it has traditionally used direct labor hours (DLH) as the cost driver or activity base for its Mfg. O/H rate. The labor estimate for the current year is 200,000 DLH.

A. Calculate the predetermined estimated Mfg. O/H rate using the traditional base, and then apply that rate to the data to estimate the per unit cost of each of Richards products for the current year?

Mfg. O/H Rate =

Unit Product Cost: Product G Product S

Direct Materials

Direct Labor

Mfg. O/H

________ ________

Total Cost

B. Richards Company is considering going to Activity Based Costing (ABC). Management believes the use of a traditional base such as DLH results in too much cost going into Product G and as a result, too little into Product S. For its ABC System, Richards has decided on five activities and has estimated the number of events or transactions for each activity. Calculate the average cost per event or rate per occurrence for each activity and use that amount as the analysis continues in the steps that follow.

Traceable Total Cost per Events by Product

ABC Defined Activity $ Costs Events Event Prod G Prod S

Machine Set-Ups - # of set-ups $100,000 500 100 400

P.O.s Written - # of P.O.s 200,000 10,000 8,000 2,000

Machine Time Run Mach. Hrs. 300,000 50,000 hrs 30,000 20,000

Eng. Spec. Orders - # of orders 100,000 50 -0- 50

General Factory 500,000 200,000 DLH 150,000 50,000

Total Mfg. O/H $1,200,000

C. Using the cost per event or rate per occurrence from the previous step, set up a table by product and then assign the Mfg. O/H costs to each of the two products. Sum the totals for each product, and also add those two amounts together to make sure you have agreed to the $1,200,000 total in Mfg. O/H. Finally, divide each products total $ by the number of units to arrive at per unit cost of Mfg. O/H.

Product G Product S

Defined Activity Cost per Event # Events $ Amount # Events $ Amount

Machine Set Ups 100 400

P.O.s Written 8,000 2,000

Machine Hours 30,000 20,000

Eng. Spec. Orders -0- 50

General Factory 150,000 50,000

Total Mfg. O/H Assigned

Divide by # of Units

Per Unit Mfg. O/H Cost

D. Use the Mfg. O/H cost above to complete the unit product cost for each of the two products. Compare your results with those in part 1. to see if use of ABC makes a significant difference is cost allocation.

Unit Product Cost: Product G Product S

Direct Materials

Direct Labor

Mfg. O/H

________ ________

Total Cost