Sanford and Son manufacturers wicker patio chairs and tables. At the end of the

Question

Sanford and Son manufacturers wicker patio chairs and tables. At the end of the year, the following information is available: Patio Chairs Patio Tables Total Cost Machine Setups 300 Inspections 500 Labor Hours 3,750 1.250 900 940 $84,000 $144,000 Sandford and Son is considering switching from one overhead rate based on labor hours to activity-based costing You are asked to do the following REQUIRED hours. B. Compute total machine setups and inspection costs assigned to each product, using activity based costing C. Make recommendation as to the better of the two approach, A or B Be specific A Compute total machine setups and inspections costs assigned to each product using the traditional single overhead rate, labor

Explanation / Answer

Activity based costing identifies different cost pool and activities associated with it and allocates cost on this basis, so this gives accurate allocation of cost to products and increases the traceability of the cost to the product or services. In other words ABC costing assigns factory/manufacturing overhead based on the activities identified and assigning cost to those activities according to the actual consumption by each activity.ABC assigns the manufacturing overhead cost to the product in rational and logical manner.

Whereas Traditional method of allocation of manufacturing overhead based on predetermined overhead rate so it does not give correct allocation of overhead.  

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Estimated Overhead rate 45.60 per direct labor hour (84000+144000)/(3750+1250) ans A Total machine setup and insPection cost 84000+144000 228000 Patio Chairs Patio Tables Machine setup and inspection cost 171000 57000 (3750*45.6) (1250*45.6) ANS B Patio chairs Patio Tables Depatment Conversion cost C Activity driver A Activityrate F=C/A Activity driver D Cost allocated D*F Activity driver G Cost alloacted G*F Machine Setup $84,000 1200 $70 300 $21,000 900 $63,000 Inspections 144000 1440 $100 500 $50,000 940 $94,000 Total $71,000 $157,000 Ans c B is better.

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