Question
Part 3 Charles Jackson, the accounting manager at Big Als, has just returned from a conference on activity-based costing in Seattle and thinks Big Als
Part 3 Charles Jackson, the accounting manager at Big Als, has just returned from a conference on activity-based costing in Seattle and thinks Big Als should consider implementing an ABC system at the beginning of year 2. Charles has identified five primary activities taking place in the production facility at Big Als, has traced overhead costs to each activity, and has identified a cost driver for each activity as follows : ESTIMATED YEAR 2 OVERHEAD COSTS:
Activity | Monthly Overhead Cost | Cost Driver |
Material delivery and handling | $4,620 | Number of shipments |
Assembly of pizzas | $5,670 | Direct labor hours |
Packaging | $1,260 | Number of pizzas |
Storage of materials | $3,150 | Refrigerator space |
Quality inspections | $2,100 | Number of inspections |
Big Als gets material for the veggie pizzas twice per week so the veggies can remain fresh and crisp until used in production. Veggie pizzas are also thicker, due to the height of the toppings, than a one-topping meat pizza so more refrigerator space is estimated to be needed. Big Als has also determined that meat pizzas need to be inspected more frequently for quality control due to the much higher volume of production. Charles has estimated the activity for each cost driver as follows:
| Meat Pizzas | Veggie Pizzas | Total |
Number of material shipments | 52 | 108 | 160 |
Direct labor hours | 87,500 | 7,000 | 94,500 |
Number of pizzas | 352,800 | 25,200 | 378,000 |
Refrigerator space (cubic feet) | 2,500 | 500 | 3,000 |
Number of inspections | 80,000 | 4,000 | 84,000 |
Required: A. Using the overhead activity categories identified above, classify Big Als overhead costs as unit-level, batch-level, product-level, or facility-level. B. Using the preceding activities and cost drivers, calculate a predetermined overhead rate for each activity. C. Using ABC, how much estimated overhead would be allocated to a meat pizza and a veggie pizza? D. Compare the estimated overhead allocation using ABC to the estimated overhead allocation using direct labor hours. E. What are some of the advantages and disadvantages of using ABC in this case? F. Would you suggest that Big Als adopt an ABC system? Why? G. Does the information provided by the ABC system give you some insight into areas of cost reduction? What areas have the greatest potential for cost reduction, and what are the potential impacts on the business from these cost reductions?
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