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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 Product design Digging trenches 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, eg. 12.25.) WATERWAYS CORPORATION Estimated Use of Cost Drivers per Activity Activity Cost Pools Cost Drivers Estimated Overhead Use of Cost Drivers Irrigation installation Labor cost $2,002,200 14,100 14,077 1,805,500 36,110,000 36,111,000 Machining (all machine use) Customer orders Shipping 29,770 2,290 2,252 Machine hours Number of orders none (direct) Cost per design N/A N/A traced directly 7 Design 896 8 Selling Number of sales calls 361,500 24,100 24,310 WATERWAYS CORPORATION Activity- Based Overhead Rates Activity Cost Pools OH Cost Assigned Irrigation installation $ $ Machining (all machine use) Customer orders Design Selling
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