AirComp Corporation produces component parts for the aircraft industry. The comp
ID: 2599950 • Letter: A
Question
AirComp Corporation produces component parts for the aircraft industry. The company maintains a job-costing system consisting of direct materials, direct labor cost and manufacturing overhead.
For 20x1, the Company is considering changing its method of allocating manufacturing overhead to production jobs from the single-indirect cost allocation approach to the activity-based costing (“ABC”) indirect cost allocation approach.
For purposes of developing manufacturing overhead allocation rates, AirComp’s cost accounting team prepared the following analysis:
Activity
Cost
Cost Driver
Materials inspection
$30,800
Amount of direct materials cost
Materials handling
16,200
Number of material movements
Production scheduling
36,000
Number of batches scheduled
$83,000
Additionally, for 20x1, AirComp’s cost accountant team prepared the following analysis of the direct costs and indirect cost activities for Job 100 and Job 200, the only production jobs in process for the period:
Job 100
Job 200
Units
1,000
5,000
Number of batches scheduled
50
10
Number of material movements
80
20
Direct materials
$40,000
$100,000
Direct labor
$20,000
$25,000
Required
For each job, determine total cost and per unit cost for the month using direct labor dollars to allocate manufacturing overhead to each job.
For each job, determine total cost and per unit cost for each job using an activity-based costing approach to allocate manufacturing overhead cost to job.
Compare the per unit cost figures for each job computed in step a. and step b., above. Why do the new ABC approach differ from the single-indirect cost allocation systems differ in the amount of the per unit indirect cost allocated to each job (i.e. what was the implications of the cost allocation method change on the amount of per unit cost allocated to each job and what factors caused the observed changes).
How might AirComp Corporation use the information from ABC allocation approach to better manage its business, i.e. what are the advantages of using an activity-based costing approach?
Activity
Cost
Cost Driver
Materials inspection
$30,800
Amount of direct materials cost
Materials handling
16,200
Number of material movements
Production scheduling
36,000
Number of batches scheduled
$83,000
Explanation / Answer
1. Direct Labor Dollars:
Predetermined overhead rate = Estimated Total Overhead Cost / Estimated Total Direct Labor Dollars = $ 83,000 / $ 45,000 = $ 1.84 per direct labor dollar.
2. Activity Based Costing:
Allocation of Manufacturing Overhead to jobs:
There appears to have been distortion in cost information. There was undercosting for Job 100, and overcosting for Job 200. As the only allocation base under traditional costing was direct labor dollars, Job 100 was subjected to undercosting because the direct labor dollars for Job 100 is lower as compared to that for Job 200.
It is likely that the company was underquoting for Job 100, and overquoting for Job 200. As a result, it is possible that losses were being incurred on Job 100, and market share was being sacrificed for Job 200.
Implementation of ABC can improve profitability for Job 100, and increase sales volume for Job 200, resulting in overall improved profitabilty and growth.
Job 100 Job 200 Direct Materials $ 40,000 $ 100,000 Direct Labor 20,000 25,000 Manufacturing Overhead 36,890 46,110 Total Cost $ 96,890 $ 171,110 Units 1,000 5,000 Unit Cost $ 96.89 $ 34.22Related Questions
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