Question
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 | |
Digging trenches | Product design | |
Janitorial | Purchasing materials | |
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, e.g. 12.25.)
WATERWAYS CORPORATION Estimated Overhead Actual Use of Drivers Cost Drivers Activity Cost Pools Irrigation installation Machining (all machine use) Customer orders Labor cost Expected Use of Cost Drivers per Activity 12,520 34,169,000 2,310 N/A $1,903,040 1,708,450 30,030 N/A Machine hours 12,498 34,170,000 2,282 traced directly Number of orders Shipping Design Selling none (direct) Cost per design Number of sales calls 896 8 7 384,000 24,000 24,200 WATERWAYS CORPORATION Activity Cost Pools Activity- Based Overhead Rates Actual Cost Assigned Irrigation installation $ $ Machining (all machine use) Customer orders Design SellingStep by Step Solution
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