Question

The wireless phone manufacturing division of a consumer electronics company uses activity-based costing. For simplicity, assume that its accountants have identified only the following three activities and related cost drivers for indirect production costs: Activity Cost Driver Materials handling Direct-materials cost Engineering Engineering change notices Power Kilowatt hours Three types of cell phones are produced: Senior, Basic, and Deluxe. Direct costs and cost-driver activity for each product for a recent month are as follows: Senior Basic Deluxe Direct-materials cost $25,000 $ 60,000 $135,000 Direct-labor cost $14,546 $ 3,762 $ 6,772 Kilowatt hours 230,000 220,000 100,000 Engineering change notices 21 20 69 Indirect production costs for the month were as follows: Materials handling $ 15,400 Engineering 99,000 Power 11,000 Total indirect production cost $125,400 1. Compute the indirect production costs allocated to each product with the ABC system. 2. Suppose all indirect production costs had been allocated to products in proportion to their direct labor costs. Compute the indirect production costs allocated to each product. 3. In which product costs, those in requirement 1 or those in requirement 2, do you have the most confidence

Answer 1

1. The indirect production costs allocated to each product with the ABC system:

Senior Basic Deluxe Total

Total indirect production cost $25,250 $26,600 $73,550 $125,400

2. The indirect production costs allocated to each product with direct labor costs:

Senior Basic Deluxe Total

Total indirect production cost $72,730 $18,810 $33,860 $125,400

3. I repose much more confidence in the product costs according to requirement 1.

Step-by-step explanation:

a) Data and Calculations:

Activity Cost Driver

Materials handling

Direct-materials cost

Engineering Engineering

Senior Basic Deluxe Total

Direct-materials cost $25,000 $ 60,000 $135,000 $220,000

Direct-labor cost $14,546 $ 3,762 $ 6,772 $25,080

Kilowatt hours 230,000 220,000 100,000 550,000

Engineering change notices 21 20 69 110

Indirect production costs:

Materials handling $ 15,400 $15,400/$220,000 = $0.07

Engineering 99,000 $99,000/110 = $900

Power 11,000 $11,000/550,000 = $0.02

Total indirect production cost $125,400

Overhead Senior Basic Deluxe

Rates

Materials handling $0.07 $1,750 $4,200 $9,450

Engineering $900 18,900 18,000 62,100

Power $0.02 4,600 4,400 2,000

Total indirect production cost $25,250 $26,600 $73,550

Allocation based on direct labor costs:

Predetermined rate = $5 per direct labor cost.

Senior Basic Deluxe Total

Total indirect production cost $72,730 $18,810 $33,860 $125,400