The Automachine Corporation produces three high-quality components and last year allocated all costs
except material on the basis of direct labour hours/unit. However, due to the introduction of CAD/CAM
and a complete review of the cost allocation system, Automachine Corporation is considering changing
its basis of machined component costs. For the following year the budget and production data have been
extracted by the machine manufacturing department:
Activity 1 – Automated machinery total cost $1,800,000
Activity 2 – Finishing operations total cost 530,000
Activity 3 – Material handling total costs 130,000
Activity 4 – Packaging and shipping costs 100,000
Activity 5 – Production setup total costs 80,000
Activity 6 – Production scheduling total costs 60,000
$2,700,000
The most appropriate cost drivers for the six activities have been identified as: machine hours, direct
labour hours, number of parts, number of orders shipped, number of production setups, and number of
production orders respectively.
Based on actual data for the previous year, next year’s predicted data for the three high-quality
components are as follows:
Compu #123 Compu #456 Compu #789
Machine hours/unit 4 4 10
Direct labour hours/unit 1 3 6
Number of parts/unit 15 25 60
Number of orders shipped 500 1,000 400
Number of production setups 50 25 25
Number of production orders 150 35 100
Total units to be produced 5,000 2,500 400
Direct materials cost/unit 40 25 55
Required:
As the Management Accountant for the Automachine Corporation, prepare supporting schedules for:
a) Activity rates for each of the six activities.
b) A budget of total costs and unit costs for each of the three components, excluding direct
materials.
c) The computation of the budgeted total and unit costs using the old direct labour hour based
system for each of the three components.
d) Comparing the results of (b) and (c) above suggest the most appropriate system, and discuss the
pros and cons of using ABC cost drivers