Question

Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs.

Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below area sample of possible cost pools for Waterways.
Assembling Payroll
Billing Plant supervision
Digging trenches Product design
Janitorial Purchasing materials
Machine maintenance Selling
Machine setups Testing
Molding Welding
Packaging
Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways.
WATERWAYS CORPORATION
Activity Cost Estimated Expected Use
Pools Cost Drivers Overhead of Cost Drivers Actual Use
per Activity of Drivers
Irrigation
installation Labor cost $1,928,440 13,030 13,010
Machining (all
machine use) Machine hours 1,668,750 33,375,000 33,376,000
Customer
orders Number of
orders 28,600 2,600 2,562
Shipping none (direct) N/A N/A traced directly
Design Cost per design 763 7 6
Selling Number of sales
calls 306,000 20,400 20,610
How would you classify each of the following activities by level-unit level, batch level, product level, or facility level?
Testing of products (if all items are tested)
Testing of products (if all items are not tested)
Designing new products
Packaging
Molding
Assembling
Depreciation
Machine maintenance
Advertising
Equipment setups
Electricity required to run equipment
Requisitioning materials

Answer 1

WATERWAYS CORPORATION

1. Overhead Rates and Actual Cost

Activity Cost Activity-based Actual Cost

Pools Overhead Rates Assigned

Irrigation Installation $148 ($1,928,440/13,030) $1,925,480 ($148 * 13,010)

Machining $0.05 $1,668,800

(all machine use) ($1,668,750/33,375,000) ($0.05 * 33,376,000)

Customer Orders $11 ($28,600/2,600) $28,182 ($11 * 2,562)

Design $109 ($763/7) $654 ($109 * 6)

Selling $15 ($306,000/20,400) $309,150 ($15 * 20,610)

2. Classification of activities by level, unit level, batch level, product level, or facility level:

Testing of products (if all items are tested) Unit level

Testing of products (if all items are not tested) Batch level

Designing new products Product level

Packaging Unit level

Molding Product level

Assembling Batch level

Depreciation Facility level

Machine maintenance Facility level

Advertising Product level

Equipment setups Batch level

Electricity required to run equipment Unit level

Requisitioning materials Unit level

Step-by-step explanation:

a) Data and Calculations:

ABC system for Waterways.

WATERWAYS CORPORATION

Activity Cost Estimated Expected Use

Pools Cost Drivers Overhead of Cost Drivers Actual Use

per Activity of Drivers

Irrigation Installation Labor cost $1,928,440 13,030 13,010

Machining

(all machine use) Machine hours 1,668,750 33,375,000 33,376,000

Customer orders Number of orders 28,600 2,600 2,562

Shipping none (direct) N/A N/A traced directly

Design Cost per design 763 7 6

Selling Number of sales calls 306,000 20,400 20,610