Question - Woodland Industries manufactures and sells custom-made windows. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $18 per hour and that there were no beginning inventories. The following information was available for 2016, based on an expected production level of 52,100 units for the year, which will require 226,000 direct labor hours:
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Activity Cost Driver
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Budgeted Costs for 2016
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Cost Driver Used as Allocation Base
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Cost Allocation Rate
|
|
Materials handling
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$38,420
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Number of parts used
|
$0.17 per part
|
|
Cutting and lathe work
|
2,583,180
|
Number of parts used
|
11.43 per part
|
|
Assembly and inspection
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4,294,000
|
Direct labor hours
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19.00 per hour
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The following production, costs, and activities occurred during the month of July:
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Units Produced
|
Direct Materials Costs
|
Number of Parts Used
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Direct labor
|
|
3,200
|
$102,700
|
1,081
|
13,500
|
Required:
a. Calculate the total manufacturing costs and the cost per unit of the windows produced during the month of July (using the activity based costing approach).
b. Assume instead that Woodland Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity based costing system previously described). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of July. (Hint: You will need to calculate the predetermined overhead application rate using the total budgeted overhead costs for 2016.)
c. Which approach do you think provides better information for manufacturing managers?
- Activity based costing
- Direct labor hours basis