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Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many
Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs. Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below area sample of possible cost pools for Waterways. Assembling Payroll Billing Plant supervision Product design Digging trenches Purchasing materials Janitorial Machine maintenance Selling Machine setups Testing Molding Welding Packaging Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways. (Round answers to 2 decimal places, eg. 12.25. WATERWAYS CORPORATION Expected Use of Cost Activity Cost Pools Estimated Drivers per Activity Actual Use of Overhead Cost Drivers Drivers $1,996,500 13,292 Irrigation installation Labor cost 13,310 Machining (all machine use) Machine hours 1,598,300 31,966,000 31,967,000 Customer orders Number of orders 29,520 2,460 2,426 N/A traced directly Shipping none (direct) N/A Cost per design Number of sales calls Design 736 8 7 Selling 313,500 20,900 21,100 WATERWAYS CORPORATION Activity Based Actual Activity Cost Overhead Cost Pools Rates Assigned Irrigation installation $ $ Machining (all machine use) Customer orders Design Selling How would you dlassify each of the following activities by level-unit level, batch level, product level, or facility level? Testing of products (if all items are tested) Testing of products (if all items are not tested) Designing new products Packaging Molding Assembling Depreciation Machine maintenance Advertising Equipment setups Electricity required to run equipment Requisitioning materials
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