Activity-based costing provides vital information for managers to help them make strategic decisions. In this assignment, youll have the opportunity to use activity-based costing in a basic manufacturing situation.

Manufacture manufactures aircraft parts for small aircraft. The companys business has consisted of 50% government contract work and 50% non-government work. Traditionally, the costs of the Material Handling Department have been allocated to direct material as a percentage of direct-material dollar value. Recently, the government contract work has been declining and government auditors have questioned the viability of this approach. As the management accountant for Wichita Aero Works, you have been asked to determine a more appropriate method of allocating material handling costs. You have evaluated the work of the material handling department and have determined the following information:

• The majority of the direct-material purchases for government contracts are high-dollar, low-volume purchases, while non-government work represents low-dollar, high-volume purchases.
• Administrative departments such as accounting, HR and maintenance also use the services of the material handling department but have not been allocated charges for these services.

• The components of the Material-Handling Department budget for 20XX are as follows:
  • Payroll - $300,000
  • Employee Benefits - $50,000
  • Telephone - $60,000
  • Materials and supplies - $10,000
  • Depreciation - $9,000
  • Direct-material budget:
  • Government - $3,000,000
  • Non-Government - $1,200,000

• You have determined that purchase orders are the appropriate cost driver for allocating material handling costs. The estimated number of purchase orders to be processed in 20XX is as follows:
  • Government Contracts - 100,000
  • Non-Government Contracts - 225,000
  • Accounting - 2,000
  • Marketing - 1,500
  • Maintenance - 3,500
  • Total - 332,000

Instructions

Prepare the following information in a document:

1. Calculate the material handling rate that would have been used based on the traditional allocation.
2. Calculate the material handling rate to be allocated on a per purchase order basis.
3. Calculate the material handling costs assigned to government contracts based on the traditional method.
4. Calculate the material handling costs assigned to government contracts based on the ABC method.