Ms. Fluffy Flaxoil, the president, has heard that using Activity-Based Costing overhead allocations might give her more accurate product costing. And Fluffy loves to be accurate almost as much as she loves to be fit, trim and rich. Right now they just use a traditional, Single-Rate, overhead allocation system based on machine hours. Below are some of the cost and activity information that a consultant has provided the firm to consider in deciding whether to switch to ABC.
Background: The Company made 2,000 Mucho-Dinero exercisers and 9,000 Dumpy in 2012. The Mucho-Dinero uses 5 machine hours, 1.5 hours of inspection time, + hour of equipment maintenance, and 4 direct labor hours to make. The Dumpy uses 3 hours of machine time, 1 hour of inspection, i hour of equipment maintenance and 2 hours of direct labor to manufacture. Estimated overhead costs and related 2012 data follow:
(Assume there are the only overhead costs)
| Overhead Area |
Cost Driver |
Estimated costs |
Estimated Activity |
| Assembly |
Machine hours |
$540,000 |
36,000 hours |
| Quality Control |
Inspector labor hours |
$150,000 |
5,000 hours |
| Equip. Maintenance |
Maintenance hours |
$240,000 |
4,000 hours |
| All other overhead |
Direct labor hours |
$600,000 |
60,000 hours |
Required: What is the overhead cost that would be assigned to each product (Mucho-Dinero & Dumpy) for each of the two products?
a) Using Activity-based costing methods determine the total cost by product and unit cost for each.
b) If they used the traditional, single-driver method, what would be the rate based on the above information.