Woodland Industries manufactures and sells custom-made windows.Its job costing system was designed using an activity-based costingapproach. Direct materials and direct labor costs are accumulatedseparately, along with information concerning three manufacturingoverhead cost drivers (activities). Assume that the direct laborrate is $15 per hour and that there were no beginning inventories.The following information was available for 2013, based on anexpected production level of 50,000 units for the year, which willrequire 200,000 direct labor hours:
Activity
(Cost Driver) Budgeted
Costs for 2013 Cost DriverUsed
as Allocation Base Cost
Allocation Rate Materials handling $ 250,000 Number of partsused $ 0.20 per part Cutting and lathe work 1,750,000 Number of partsused 1.40 per part Assembly and inspection 4,000,000 Direct laborhours 20.00 per hour
The following production, costs, and activities occurred duringthe month of July:
Units
Produced Direct
Materials Costs Number
of Parts Used Direct
Labor Hours 3,200 $107,200 70,400 13,120
Required: a. Calculate the total manufacturing costs and the cost per unit ofthe windows produced during the month of July (using theactivity-based costing approach). (Round "cost per unitproduced" to 2 decimal places.)
b. Assume instead that Woodland Industries applies manufacturingoverhead on a direct labor hours basis (rather than using theactivity-based costing system previously described). Calculate thetotal manufacturing cost and the cost per unit of the windowsproduced during the month of July. (Hint: You will need tocalculate the predetermined overhead application rate using thetotal budgeted overhead costs for 2013.) (Round "cost perunit produced" to 2 decimal places.)
Woodland Industries manufactures and sells custom-made windows.Its job costing system was designed using an activity-based costingapproach. Direct materials and direct labor costs are accumulatedseparately, along with information concerning three manufacturingoverhead cost drivers (activities). Assume that the direct laborrate is $15 per hour and that there were no beginning inventories.The following information was available for 2013, based on anexpected production level of 50,000 units for the year, which willrequire 200,000 direct labor hours:
| Activity (Cost Driver) | Budgeted Costs for 2013 | Cost DriverUsed as Allocation Base | Cost Allocation Rate | ||||
| Materials handling | $ | 250,000 | Number of partsused | $ | 0.20 | per part | |
| Cutting and lathe work | 1,750,000 | Number of partsused | 1.40 | per part | |||
| Assembly and inspection | 4,000,000 | Direct laborhours | 20.00 | per hour | |||
The following production, costs, and activities occurred duringthe month of July: |
| Units Produced | Direct Materials Costs | Number of Parts Used | Direct Labor Hours |
| 3,200 | $107,200 | 70,400 | 13,120 |
| Required: | |
| a. | Calculate the total manufacturing costs and the cost per unit ofthe windows produced during the month of July (using theactivity-based costing approach). (Round "cost per unitproduced" to 2 decimal places.) |
| b. | Assume instead that Woodland Industries applies manufacturingoverhead on a direct labor hours basis (rather than using theactivity-based costing system previously described). Calculate thetotal manufacturing cost and the cost per unit of the windowsproduced during the month of July. (Hint: You will need tocalculate the predetermined overhead application rate using thetotal budgeted overhead costs for 2013.) (Round "cost perunit produced" to 2 decimal places.) |
Related questions
AirComp Corporation produces component parts for the aircraftindustry. In prior years, they maintained a job-costing systemconsisting of direct materials and direct labor cost andmanufacturing overhead. Manufacturing overhead was allocated toproduction jobs using a single-indirect cost allocation rate, whichwas $115 per direct labor hour.
For 20x1, the Company decided to change the method of allocatingmanufacturing overhead to production jobs from the single-indirectcost allocation approach to the activity-based costing (âABCâ)indirect cost allocation approach. For purposes of developing theABC allocation rates, AirCompâs cost accounting team prepared thefollowing analysis:
Activity | Cost Driver | Allocation Rate |
Material handling | Parts handled | $0.40 |
Lathe work | No. of lathe turns | $0.20 |
Milling | Machine hours | $20.00 |
Grinding | No. of parts ground | $0.80 |
Testing | No. of units tested | $15.00 |
For 20x1, AirCompâs cost accountant team prepared the followinganalysis of the direct costs and indirect cost activities for Job100 and Job 200, the only production jobs in process for theperiod:
Job 100 | Job 200 | |
Direct materials cost | $9,700 | $59,900 |
Direct labor cost | $750 | $11,250 |
No. of direct manufacturing labor hours | 25 | 375 |
No. of parts ground | 500 | 2,000 |
No. of lathe turns | 20,000 | 60,000 |
Machine hours | 150 | 1,050 |
No. of units produced during period (all are tested) | 10 | 200 |
Required
1.For each job, determine total per unit cost using direct laborhours to allocate manufacturing overhead to each job.
2.For each job, determine total per unit cost using anactivity-based costing approach to allocate manufacturing overheadcost to job.
3.Compare the per unit cost figures for each job computed instep a. and step b., above. Why do the new ABC approach differ fromthe single-indirect cost allocation systems differ in the amount ofthe per unit indirect cost allocated to each job (i.e. what was theimplications of the cost allocation method change on the amount ofper unit cost allocated to each job and what factors caused theobserved changes).
4.How might AirComp Corporation use the information from ABCallocation approach to better manage its business, i.e. what arethe advantages of using an activity-based costing approach?
Activity-Based Costing
Hercules Industries manufactures two types of electrical powerunits, custom and standard, which involve four overheadactivitiesâproduction setup, procurement, quality control, andmaterials management. An activity analysis of the overhead revealedthe following estimated costs and activity bases for theseactivities:
| Activity | Cost | Activity Base | |
| Production setup | $ 87,000 | Number of setups | |
| Procurement | 159,500 | Number of purchase orders (PO) | |
| Quality control | 174,000 | Number of inspections | |
| Materials management | 140,000 | Number of components | |
| Total | $560,500 | ||
The activity-base usage quantities for each product are asfollows:
| Setups | Purchase Orders | Inspections | Components | UnitVolume | ||||||
| Custom | 300 | 1,200 | 2,400 | 400 | 2,000 | |||||
| Standard | 300 | 250 | 500 | 300 | 2,000 | |||||
| Total | 600 | 1,450 | 2,900 | 700 | 4,000 | |||||
a. Determine an activity rate for eachactivity.
| Activity Rates | Production Setup | Procurement | Quality Control | Materials Management | ||||
| Activity cost | $ | $ | $ | $ | ||||
| Activity base | ||||||||
| Activity rate | $ | /setup | $ | /PO | $ | /inspection | $ | /component |
b. Assign activity costs to each product, anddetermine the unit activity cost using the activity rates from part(a). Round unit costs to the nearest cent.
| Custom | Standard | |||
| Setups Total | $ | $ | ||
| Purchase Orders Total | ||||
| Inspections Total | ||||
| Components Total | ||||
| Total product cost | $ | $ | ||
| Unit volume | ||||
| Unit cost | $ | $ | ||
c. Assume that each product required one directlabor hour per unit. Determine the per unit cost if factoryoverhead is allocated on the basis of direct labor hours. Roundyour answer to the nearest cent.
$per unit
d. The custom product will consumemore materials management activities than will thestandard product.
