PROBLEM 6-15. Activity-based Costing—Comprehensive Problem [lo 2] The Riverdale
ID: 2567848 • Letter: P
Question
PROBLEM 6-15. Activity-based Costing—Comprehensive Problem [lo 2] The Riverdale Printing Company prints limited edition art books with production runs of 15,000 to 100,000. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to one product, Art of Design, and the ABC cost pools:
a. Calculate the overhead rate per unit of activity for each of the five cost pools.
b. Calculate the total overhead assigned to the production of the Art of Design. Round to two decimal places.
c. Calculate the overhead cost per unit for the Art of Design.
d. Calculate the total unit cost for the Art of Design.
e. Suppose that Riverdale Printing allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the over- head rate per direct labor dollar and the per unit overhead assigned to the Art of Design. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach.
Please show all steps. Thank you.
Art of Design: Annual production Direct materials Direct labor per unit 40,000 units $37 $8 Manufacturing overhead cost pools Cost Pool Cost Cost Driver $ 840,000 Materials ordering Materials inspection Equipment setup Quality control Other Number of purchase orders Number of receiving reports Number of setups Number of inspections Direct labor cost 525,000 2,500,000 1,000,000 25,000,000 $29,865,000 Total manufacturing overhead Annual activity information related to cost drivers: Cost Pool All Books Art of Design Materials ordering Materials inspection Equipment setup Quality control Other 120,000 orders 1,200 315 2,100 receiving reports 125 setups 5,000 inspections $12,500,000 direct labor 500 $320,000Explanation / Answer
ABC system Estimated cost Cost driver Cost per driver Material ordering 840000 120000 7 Material inspection 525000 2100 250 Equipment setup 2500000 125 20000 Quality control 1000000 5000 200 Other 25000000 12500000 2 29865000 ABC system Cost driver Art of design Total cost Material ordering 7.00 1200 8400 Material inspection 250 315 78750 Equipment setup 20000 1 20000 Quality control 200 500 100000 Other 2 320000 640000 Total overheads 847150 Number of units 40000 Cost per unit 21.18 Traditional method Manufacturing overhead rate 2.3892 (29865000/12500000) Manufacturing overhead art design 764544 (320000*2.3892) Manufacturing overhead per unit 19.11 (764544/40000) ABC Traditional method Direct material 37 37 Direct labor 8 8 Manufacturing overheads 21.18 19.11 Total unit cost 66.18 64.11
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