B A E F Activity-Based Costing, Lean Operations, and the Costs of Quality Use ABC to allocate manufacturing overhead Several years after reengineering its production process, Dettling Corporation hired a new controller, Alana Metzgar. She developed an ABC system very similar to the one used by Dettling's chief rival. Part of the reason Metzgar developed the ABC system was because Dettling's profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system, the company 4 had used a plantwide overhead rate based on direct labor hours that was developed years ago. 5 For the upcoming year, Dettling's budgeted ABC manufacturing overhead allocation rates are as 6 follows: 7 Activity Cost Activity Materials handling Allocation Base 8 Allocation Rate Number of parts Number of setups Number of parts Finishing direct labor hours 4.50 per part $325.00 per setup 31.00 per part Machine setup 10 Insertion of parts 11 $ Finishing $ 51.00 per hour 12 13 Ti INSTRUCTIONS ENTERANSWERS Ready co a A E C E G H M 13 The number of parts is now a feasible allocation base because Dettling recently installed a plantwide computer system. Dettling produces two wheel models: Standard and Deluxe. Budgeted 14 data for the upcoming year are as follows: 15 16 Standard Deluxe Units Expected production for each model Parts per wheel 17 1,000 18 4.0 6.0 19 Setups per 1,000 wheels Finishing direct labor hours per wheel Total direct labor hours per wheel 20.0 20.0 20 1.0 3.0 21 2.7 3.8 22 23 Use the blue shaded areas on the ENTERANSWERS tab for Inputs. 24 Always use cell references and formulas where appropriate to receive full credit. 25 26 Requirements 27 1 Compute the total budgeted manufacturing overhead cost for the upcoming year 2 Compute the manufacturing overhead cost per wheel of each model using ABC. 3 Compute the company's traditional plantwide overhead rate Use this rate to determine the manufacturing overhead cost per wvheel under the traditional system 28 29 30 31 Saving & Submitting Solution INSTRUCTIONs ENTERANSWERS + 1 1. Compute the total budgeted manufacturing overhead cost for the upcoming year. 2 (Always use cell references and formulas where appropriate to receive full credit.) 3 Total Budgeted 4 Activity Indirect Cost 5 Materials handling 6 Machine setups 7 Insertion of parts 8 Finishing 9 Total budgeted indirect costs 10 11 2. Compute the manufacturing overhead cost per wheel of each model using ABC. 12 (Always use cell references and formulas where appropriate to receive full credit.) 13 Allocated Activity Cost Per Activity 14 Wheel 15 Standard Deluxe 16 Materials handling 17 Machine setups 18 Insertion of parts 19 Finishing INSTRUCTIONS ENTERANSWERS Ready
