Question

Activity-Based Costing and Conventional Costs Compared

Chef Grill Company manufactures two types of cooking grills: the Gas Cooker and the Charcoal Smoker. The Cooker is a premium product sold in upscale outdoor shops; the Smoker is sold in major discount stores. Following is information pertaining to the manufacturing costs for the current month.

Gas Cooker Charcoal Smoker
Units 1,000 5,000
Number of batches 70 10
Number of batch moves 80 20
Direct materials $20,000 $100,000
Direct labor $20,000 $29,000


Manufacturing overhead follows:

Activity Cost Cost Driver
Materials acquisition and inspection $252,000 Amount of direct materials cost
Materials movement 16,700 Number of batch moves
Scheduling 48,000 Number of batches
$316,700


Rounding instructions: Do not round until your final answers. Round total cost answers to the nearest dollar and per unit answers to the nearest cent.



(a) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming all manufacturing overhead is assigned on the basis of direct labor dollars.

HINT: Use 6.4633 for overhead rate calculation.

Total cost Answer
485,700
Gas Cooker Answer
169.27
per unit
Charcoal Smoker Answer
63.28
per unit


(b) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming manufacturing overhead is assigned using activity-based costing.

Total cost Answer
137,360
Gas Cooker Answer
137.36
per unit
Charcoal Smoker Answer
68.59
per unit

Answer 1

The determination of the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker is as follows:

a) Using direct labor dollars to assign all manufacturing overhead:

Gas Cooker Charcoal Smoker

Total costs $195,872.50 $289,827.50

Per unit cost $169.27 $63.28

b) Using activity-based costing to assign all manufacturing overhead:

Gas Cooker Charcoal Smoker

Total costs $169,266 $316,436

Per unit cost $195.87 $57.97

How the total costs and per unit costs are determined under conventional and activity-based costing:

Gas Cooker Charcoal Smoker Total

Units 1,000 5,000

Number of batches 70 10 80

Number of batch moves 80 20 100

Direct materials $20,000 $100,000 $120,000

Direct labor $20,000 $29,000 $49,000

Manufacturing overhead follows:

Activity Cost Cost Driver

Materials acquisition and inspection $252,000 Amount of direct materials cost

Materials movement 16,700 Number of batch moves

Scheduling 48,000 Number of batches

$316,700

a) Manufacturing Overhead Assigned based on direct labor dollars:

Total manufacturing overhead cost = $316,700

Total direct labor costs = $49,000 ($20,000 + $29,000)

Overhead rate = $6.4633 ($316,700 ÷ $49,000)

Gas Cooker Charcoal Smoker

Direct materials $20,000 $100,000

Direct labor $20,000 $29,000

Overhead $129,266 $187,436

($20,000 x $6.4633) ($29,000 x $6.4633)

Total costs $169,266 $316,436

Units 1,000 5,000

Per unit cost $169.27 $63.28

b) Using ABC:

Activity Activity Rate

Materials acquisition and inspection = $5.143 ($252,000/$49,000)

Materials movement $208.75 (16,700/80)

Scheduling $480 (48,000/100)

Gas Cooker Charcoal Smoker

Number of batches $14,612.50 $2,087.50

(70 x $208.75) (10 x $208.75)

Number of batch moves $38,400 $9,600

(80 x $480) (20 x $480)

Direct labor costs $102,860 $149,140

($20,000 x $5.143) ($29,000 x $5.143)

Total overhead allocated $155,872.50 $160,827.50

Gas Cooker Charcoal Smoker

Direct materials $20,000 $100,000

Direct labor $20,000 $29,000

Overhead $155,872.50 $160,827.50

Total costs $195,872.50 $289,827.50

Units 1,000 5,000

Per unit cost $195.8725 $57.97