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Activity-Based Costing Versus Traditional Approach, Activity-Based Management. Quality Furniture, Inc., produces a wood desk that sells for $500 and a wood table that sells
Activity-Based Costing Versus Traditional Approach, Activity-Based Management. Quality Furniture, Inc., produces a wood desk that sells for $500 and a wood table that sells for $900. Last year, total overhead costs of $6,000,000 were allocated based on direct labor costs. Direct labor costs totaled $2,000,000 last year, and Quality Furniture produced 15,000 desks and 5,000 tables. Total direct labor and direct materials costs by product for last year were as follows: Desk Table Direct materials $1,575,000 $950,000 $1,200,000 $800,000 Direct labor The management of Quality Furniture would like to use activity based costing to allocate overhead rather than one plant wide rate based on direct labor costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs. Estimated Cost Driver Activity Estimated Activity Cost Driver Overhead Costs Desk Table Total Purchase orders Number of purchase orders $ 800,000 900 100 1,000 Machine setups Number of setups 1,600,000 240 260 500 Machine maintenance Machine hours 2,400,000 42,000 18,000 60,000 Quality inspections Number of inspections 1,200,000 15,000 5,000 20,000 Total $6,000,000
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