After reading an article about activity-based costing in a trade journal for the

Question

After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Santana found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.

Overhead has been applied to output at a rate of 45% of direct labor costs. The following data pertain to Job 615.

Required:
1. Classify each of its three overhead activities as unit level, batch level, product level, or facility level.

2. What is the total cost of Job 615 if Business Solutions applies overhead at 45% of direct labor cost?

3. What is the total cost of Job 615 if Business Solutions uses activity-based costing?

Activity Cost Driver Setting up machinfes $ 19,500 26 batches Inspecting components $ 5,400 5,400 parts Providing utilities $ 10,800 5,400 machine hours

Explanation / Answer

ANSWER:

1. CLASSIFICATION OF OVERHEADS:

Overheads

Classification

Reason

Setting up machines

Batch level activity

Batch level activities are those activities which varies based on number of bathes produced

Inspecting components

Product level activity

Product level activities are those activities which supports the product line

Providing utilities

Facility level activity

Facility level activities are those activities which are not directly related to individual product but have use of overall process

2.TOTAL COST OF JOB 615 IN TRADITIONAL COSTING:

Particulars

Amount ($)

Direct materials

2,100

Direct labor

3,600

Overhead (45% of direct labor)

1620

TOTAL COST

7,320

3. TOTAL COST OF JOB 615 IN ACTIVITY BASED COSTING:

Particulars

Amount ($)

Direct materials

2,100

Direct labor

3,600

Overhead:

Setting up machines (19500/26*5)

3750

Inspecting components (5400/5400*540)

540

Providing utilities (10800/5400*570)

1140

TOTAL COST

11,130

Overheads

Classification

Reason

Setting up machines

Batch level activity

Batch level activities are those activities which varies based on number of bathes produced

Inspecting components

Product level activity

Product level activities are those activities which supports the product line

Providing utilities

Facility level activity

Facility level activities are those activities which are not directly related to individual product but have use of overall process

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