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Activity-Based Costing, Lean Operations, and the Costs of Quality Use ABC to allocate manufacturing overhead Several years after reengineering its production process, Dettling Corporation hired a new controller, Alana Metzgar. She developed an ABC system very similar to the one used by Dettling's chief rival. Part of the reason Metzgar developed the ABC system was because Dettling's profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system, the company had used a plantwide overhead rate based on direct labor hours that was developed years ago. 5 6 For the upcoming year, Dettling's budgeted ABC manufacturing overhead allocation rates are as follows: 7 Activity Cost 8 Activity Allocation Base Allocation Rate Materials handling Number of parts $ 4.50 per part LO Machine setup Number of setups $ 325.00 per setup 11 Insertion of parts Number of parts $ 31.00 per part Finishing direct labor 12 Finishing hours $ 51.00 per hour 3 The number of parts is now a feasible allocation base because Dettling recently installed a plantwide computer system. Dettling produces two wheel models: Standard and Deluxe. Budgeted data for the upcoming year are as 14 follows: 15 6 Standard Deluxe Units 17 Expected production for each model 1,000 18 Parts per wheel 4.0 6.0 19 Setups per 1,000 wheels 20.0 20.0 20 Finishing direct labor hours per wheel 1.0 3.0 1 Total direct labor hours per wheel 2.7 3.8 2 3 Use the blue shaded areas on the ENTERANSWERS tab for inputs. 4 Always use cell references and formulas where appropriate to receive full credit. 25 26 Requirements 27 1 Compute the total budgeted manufacturing overhead cost for the upcoming year. 28 2 Compute the manufacturing overhead cost per wheel of each model using ABC. 9 3 Compute the company's traditional plantwide overhead rate. Use this rate to determine the manufacturing overhead cost per wheel under the traditional system. 1. Compute the total budgeted manufacturing overhead cost for the upcoming year. (Always use cell references and formulas where appropriate to receive full credit.) Activity Materials handling Machine setups Insertion of parts Finishing Total budgeted indirect costs Total Budgeted Indirect Cost $ 45,000.00 $ 13,000.00 $ 310,000.00 $ 204,000.00 $ 572,000.00 2. Compute the manufacturing overhead cost per wheel of each model using ABC. (Always use cell references and formulas where appropriate to receive full credit.) Activity Materials handling Machine setups Insertion of parts Finishing Total ABC allocated indirect cost Allocated Activity Cost Per Wheel Standard Deluxe $ 18.00 $ 27.00 $ 6.50 $ 6.50 $ 124.00 $ 186.00 $ 51.00 $ 153.00 $ 199.50 $ 372.50 3. Compute the company's traditional plantwide overhead rate. (Always use cell references and formulas where appropriate to receive full credit.) Plant overhead rate per direct labor hour $ 88.00 Use this rate to determine the manufacturing overhead cost per wheel under the traditional system. Standard Deluxe Manufacturing overhead cost per wheel $ $ 237.60 334.40
