Question
Magic Company makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no
Magic Company makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:
Model A $28
Model B $32
Model C $40
Magic Company has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
Activities | Total cost of activities | Cost Allocation Base of Each Activity | Total Numbers of Cost Drivers |
Assembly | $780,000 | Machine hours | 120,000 |
Materials management | $120,000 | Parts | 80,000 |
Testing | $22,500 | Units | 5,000 |
The Model A radio requires 12 parts to construct, and also requires 16 machine hours of processing.
The Model B radio requires 15 parts to construct, and also requires 18 machine hours of processing.
The Model C radio requires 19 parts to construct, and also requires 20.5 machine hours of processing.
Requirements:
- Calculate the cost allocation rate for each activity.
- Calculate the indirect cost allocated to one unit of Model A, Model B, and Model C under ABC system.
- What is the total manufacturing cost to make one unit of Model A, Model B, and Model C under ABC system?
- Suppose that instead of an ABC System Company has a traditional product costing system that allocates indirect costs on the basis of machine hours (total machine hours of the period are 120.000). Calculate allocation rate (round to the nearest dollar) and total manufacturing cost under traditional costing system.
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