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 are a 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 For each of the above cost pools, what would be the likely activity cost driver

Answer 1

Waterways Corporation

Cost Pools Possible Activity Cost Drivers

Assembling Direct labor hours

Payroll Number of employees

Billing Number of invoices

Plant supervision Number of factory workers

Digging trenches Depth of trenches

Product design Number of designs

Janitorial Floor space

Purchasing materials Units of materials

Machine maintenance Maintenance hours

Selling Units sold

Machine setups Number of machine setups

Testing Testing hours

Molding Number of units molded

Welding Machine hours

Packaging Number of units packaged

Step-by-step explanation:

a) 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