Activity-based costing for varying batch production

A manufacturing company has the following two activities associated with completion of products:

1. The setting up of machines for running batches of products
2. The actual production of units produced

The company has annual manufacturing overhead costs of $2,000,000, of which $200,000 is directly involved in setting up machines for batch runs. During the year, the company expects to perform 400 machine setups, one setup per batch for a total of 400 batches of production. Assume that the batch sizes vary considerably, but the work involved in setting up the machines is not appreciably different from one job to the next.

If the company estimates that the $200,000 costs associated with setups will yield 400 setups this year, the cost associated directly with each setup will be $500(I THINK)per setup. Because each job will require its own setup, setup costs are viewed as batch costs. Because $200,000 of the $2,000,000 are costs associated with setups, this means that costs associated directly with the production of units equal $1,800,000 (I THINK).

APPLY THE CONCEPTS: Calculate the batch-level cost

Determine what batch-level costs will be, both with activity-based costing (ABC) and without, to understand the method and compare and contrast both approaches. Assume that overhead not associated with setup costs is caused by production activities associated with the companys 100,000 machine hours. If an amount is zero, enter "0". Round unit costs to the nearest cent.

	With ABC		Without ABC
Total setup costs	$___?__		$0
Number of setups	400		Not applicable
Overhead costs per setup	$___?__		$___?__
Total manufacturing overhead costs	$2,000,000		$2,000,000
Less: Cost traced to machine setups	$___?__		$___?__
Overhead costs allocated on machine hours	$___?__		$2,000,000
Machine hours	100,000		100,000
Overhead costs per machine hour	$___?__		$___?__
Formula for allocating manufacturing O/H costs	$___?__ setpup cost per batch+ $___?__per machine hour		$___?__ per machine hour

The effect of batch-level costs spread among varying levels of production

APPLY THE CONCEPTS: Assign the costs at the unit level (small batch)

Now that you've determined what the cost calculation is at the batch level, extrapolate this down to the unit level to see precisely how much each unit is costing for any given-sized batch of production. For this purpose, assume that the company is considering taking on a contract for 5,000 units and it currently produces 50 units per machine hour. Assign costs with and without activity-based costing. If an amount is zero, enter "0". Round unit costs to the nearest cent.

	With ABC	Without ABC
Overhead for setting up machine	$___?__	$___?__
Number of units in batch	Not applicable
Manufacturing overhead caused by batch setup per unit	$0.10	Not applicable
Manufacturing overhead costs per machine hour	$___?__	$___?__
Number of units produced per machine hour
Manufacturing overhead caused by production per unit	$___?__	$___?__
Total manufacturing overhead allocated per unit	$___?__	$___?__

APPLY THE CONCEPTS: Assign costs at the unit level (large batch)

If the company manufactures 50,000 units and produces 50 units per machine hour, how would the costs look at this batch level?

	With ABC	Without ABC
Overhead for setting up machine	$___?__	$___?__
Number of units in batch	Not applicable
Manufacturing overhead caused by batch setup per unit	$0.01	Not applicable
Manufacturing overhead costs per machine hour	$___?__	$___?__
Number of units produced per machine hour
Manufacturing overhead caused by production per unit	$___?__	$___?__
Total manufacturing overhead allocated per unit	$___?__	$___?__