Agent Process Equipment (APE) manufactures industrial pumps. While APE has normally used a plant wide MOH rate based on machine hour usage, over the last year APE has expanded and begun to manufacture more types of pumps. This year APE expects to incur $1,635,000 in MOH costs and use 12,000 machine hours.
Until now, clean up and disposal of scrap has been absorbed into the MOH general rate and allocated across the board. However, because of new federal environmental laws, scrap material is now considered toxic and disposal costs are much higher than in previous years. APE has therefore decided to implement ABC costing to have a more accurate understanding of its costs. Expected usage rates and costs for MOH activities in the upcoming year are as follows:
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Description of Pool Cost
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Estimated Cost
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Cost Driver
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Estimated Activity this Year
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Machine Maint. Costs
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$635,000
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# Machine Hours
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10,000
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Manufacturing set-up Costs
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$200,000
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# set-ups
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500
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Scrap Disposal
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$800,000
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# Pounds disposed
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2,000
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Total MOH:
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$1,635,000
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Job #251 is comprised of the following activities:
500 pounds DM at $65 per pound
40 direct labor hours at $50 per labor hour
200 machine hours used
6 set-ups
200 pounds of material disposed
Calculate the cost of Job #251 using the traditional overhead allocation:
Calculate the application rates (including units) using activity based costing:
Machine Maintenance
Set up costs
Material Disposal
Using the above rates (or $1 per machine hour, $1 per set up, and $1 per pound disposed if you did not calculate above), calculate the total cost of Job #251 using ABC.
A reliable supplier has offered to "pre-manufacture" Job 251. They would purchase material and mold into forms that would still require the same machining and labor processes at your factory, but would only require 350 pounds of material. Which means that your manufacturing process would only create 50 pounds of material to be disposed.
This supplier would charge double for the material ($130/ pound) and $25,000 for their pre-manufacturing process. Final product delivery time and quality would be the same either way.
Should you pay for the pre-manufacture process? Yes / No
Why or why not? dollar costs and descriptions