ACTIVITY BASED COSTING

Surfs Up manufactures surfboards. The company produces two models: the small board and the big board. Data regarding the two boards are as follows:

Direct Labor Annual Total Direct

Product Hours per Unit Production Labor Hours

Big 1.5 10,000 boards 15,000

Small 1.0 35,000 boards 35,000

The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labor rate of $13 per hour. The company has historically used direct labor hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1,664,000 per year. The big board is more complex to manufacture than the small board because it requires more machine time.

Blake Moore, the companys controller, is considering the use of activity-based costing to apply overhead because the surfboards require such different amounts of machining. Blake has identified the following four separate activity centers.

Volume of Annual Activity

Traceable O/H Big Small

Activity Center Cost Driver Costs Board Board

Machine Setup Number of Setups $100,000 100 100

Special Design Design Hours $364,000 900 100

Production Direct Labor Hours $900,000 15,000 35,000

Machining Machine Hours $300,000 9,000 1,000

Required:

a. Calculate the predetermined overhead rate using the traditional overhead allocation with direct labor hours as the base.

b. Determine the total cost to produce one unit of each product. (Use the overhead rate calculated above in Part A).

c. Assume that Surfs Up has made the change to ABC, calculate the overhead rate for each activity center.

d. Using the rates calculated in Part C, determine the amount of overhead assigned to each unit of product.

e. Using the information from Part D, compute the cost to produce one unit of each product.