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.

Evian 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 are a sample of possible cost pools for Evian.

Assembling

Payroll

Billing

Plant supervision

Digging trenches

Purchasing materials

Machine maintenance

Selling

Machine setups

Testing

Molding

Welding

Packaging

Instructions for part 4

(a) For each of these cost pools, what would be the likely activity cost driver?

(b) 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 Evian.

EVIAN CORPORATION

Expected

Use of Actual

Estimated Cost Drivers Use of

Activity Cost Pools Cost Drivers Overhead per Activity Drivers

Irrigation installation Labor cost $1,999,500 12,900 12,941

Machining (all machine use) Machine hours 1,670,400 33,408,000 33,409,000

Customer orders # of orders 30,636 2,553 2,520

Shipping none (direct) N/A traced directly

Design Cost per design 820 10 7

Selling Number of calls 372,300 21,900 22,100

(d) (1) The results of ABC can provide a more accurate picture of costs. Discuss the value of Evian using this system to determine overhead costs.

(2) How might using ABC affect decision making at Evian?