Activity-based costing problem Factory A produces golf carts. One of its plants

Question

Activity-based costing problem

Factory A produces golf carts. One of its plants in Texas produces two versions of carts: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, bigger tires, and softer seats. At the beginning of the year, the following data were prepared by the controller’s office for this Texas plant:

                                                                                         Basic                         Deluxe

Expected Quantity to Produce                         20,000 carts                 10,000 carts

Selling Price                                                                $ 1,800                       $ 3,600

Direct Material Cost                                                    $     500                       $ 1,000

Direct Labor Cost                                                        $     300                       $     600

Machine Hours                                                               1,000                           3,000

Direct Labor Hours                                                     10,000                       10,000

Activity Center (Cost Driver)

Engineering Support (Hours)                                          1,500                           4,500

Receiving (Orders Processed)                                            300                              500

Material Handling (Number of Moves)                          2,000                           4,000

Purchasing (Number of Orders)                                        100                              200

Maintenance (Machine Hours Used)                              1,000                           3,000

Paying Suppliers (Invoices Processed)                              250                              500

Equipment Setups (Number of Setups)                                20                                60

Total overhead costs of $6,000,000 associated with activity centers are reported as:

Maintaining Equipment                                               $ 1,140,000

Engineering Support                                                   $ 1,200,000

Material Handling                                                       $ 1,200,000

Setting Up Equipment                                                 $    960,000

Purchasing Materials                                                   $    600,000

Receiving Goods                                                         $    400,000

Paying Suppliers                                                         $    300,000

Providing Facility Space                                             $    200,000

Facility-level costs are allocated on basis of machine hours used . This provides a measure of time the facility is used by each product.

Requirements:

Calculate the cost to produce each type of cart using direct labor hours as basis to allocate overhead costs.

Calculate the cost to produce each type of cart using activity-based-costing.

Explain the difference in the costs using the two different accounting systems. Provide appropriate supporting quantitative analysis.

Explanation / Answer

Calculate the cost to produce each type of cart using direct labor hours as basis to allocate overhead costs. Traditional overhead rate = Total overhead cost ÷ total direct labor hours 6000000 / 20000 300 per direct labor hour Manufacturing Cost per unit Basic Deluxe Direct material cost 500 1000 Direct labor cost 300 600 Manufacturing OH 150 300 Total Manuf. Cost 950 1900 (10000 x 300)/20000 = 150 (10000 x 300)/10000 = 300 Calculate the cost to produce each type of cart using activity-based-costing. Activity Activity cost ÷ activity driver = Activity rate Maintaining Equipment $1,140,000 4000 MH 285 per MH Engineering Support $1,200,000 6000 Hrs 200 per hour Material Handling $1,200,000 6000 Moves 200 per move Setting Up Equipment $960,000 80 Setups 12000 per setup Purchasing Materials $600,000 300 orders 2000 per order Receiving Goods $400,000 800 orders processed 500 per order processed Paying Suppliers $300,000 750 Invoices processed 400 per invoice processed Providing Facility Space $200,000 4000 MH 50 per MH ABC overhead allocation Basic Deluxe Maintaining Equipment                 285,000 =285*1000                         855,000 =285*3000 Engineering Support                 300,000 =200*1500                         900,000 =200*4500 Material Handling                 400,000 =200*2000                         800,000 =200*4000 Setting Up Equipment                 240,000 =12000*20                         720,000 =12000*60 Purchasing Materials                 200,000 =2000*100                         400,000 =2000*200 Receiving Goods                 150,000 =500*300                         250,000 =500*500 Paying Suppliers                 100,000 =400*250                         200,000 =400*500 Providing Facility Space                    50,000 =50*1000                         150,000 =50*3000 Total allocated OH              1,725,000                     4,275,000 ÷ NO of units 20000 10000 per unit MOH 86.25 427.50 Manufacturing Cost per unit - ABC Basic Deluxe Direct material cost 500 1000 Direct labor cost 300 600 Manufacturing OH 86.25 427.50 Total Manuf. Cost $               886.25 $                      2,027.50 Explain the difference in the costs using the two different accounting systems. Provide appropriate supporting quantitative analysis. ABC Traditional Basic 86.25 150 Deluxe 427.5 300 In the ABC OH cost per unit have changed significantly, since under traditional costing all overhead is allocated using direct labor hour that is consuming same direct labor hour, under ABC cost is divided between different activity pools that is source of cost and there is clearly visible in ABC that how much cost is used by each model.

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