Question

Activity-based Costing—Comprehensive Problem [lo 2] The Riverdale Printing Company prints limited edition art books with production runs of 15,000 to 100,000. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to one product, Art of Design, and the ABC cost pools:

Art of Design:
Annual production 40,000 units
Direct materials $37
Direct labor per unit $8
Manufacturing overhead
cost pools Cost Pool Cost Driver $ 840,000
Materials ordering $840,00 Number of purchase orders
Materials inspection 525,000 Number of receiving reports
Equipment setup 2,500,000 Number of setups
Quality control 1,000,000 Number of inspections
Other 25,000,000 Direct labor cost
Total manufacturing overhead
Annual activity information related to cost drivers:
Cost Pool All Books Art of Design
Materials ordering 120,000 orders 1,200
Materials inspection 2,100receiving reports 315
Equipment setup 125 setups 1
Quality control 5,000 inspections 500
Other $12,500,000 direct labour $320,000
a. Calculate the overhead rate per unit of activity for each of the five cost pools.
b. Calculate the total overhead assigned to the production of the Art of Design. Round to two decimal places.
c. Calculate the overhead cost per unit for the Art of Design.
d. Calculate the total unit cost for the Art of Design.
e. Suppose that Riverdale Printing allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the over- head rate per direct labor dollar and the per unit overhead assigned to the Art of Design. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach.

Answer 1

Instructions are below.

Step-by-step explanation:

a)

First, we need to calculate the activity rate for each activity:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Materials ordering= 840,000/121,200= $6.93 per order

Materials inspection= 525,000/2,415= $217.39 per report

Equipment setup= 2,500,000/126= $19,841.27 per setup

Quality control= 1,000,000/5,500= $181.82 per inspection

Other= 25,000,000/12,820,000= $1.95 per direct labor dollar

b)

Now, we can allocate overhead:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Materials ordering= 6.93*1,200= 8,316

Materials inspection= 217.39*315= 68,477.85

Equipment setup= 19,841.27*1= 19,841.27

Quality control= 181.82*500= 90,910

Other= 1.95*320,000= 624,000

Total allocated costs= $811,545.12

c)

Unitary overhead= 811,545.12/40,000= $20.30

d)

To calculate the unitary production cost, we need to use the following formula:

Total unitary cost= direct material + direct labor + allocated overhead

Total unitary cost= 37 + 8 + 20.3

Total unitary cost= $65.3

e) Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 29,865,000/12,820,000

Predetermined manufacturing overhead rate= $2.33 per direct labor costs

Allocated MOH= 2.33*320,000= $745,600

Unitary overhead= 745,600/40,000= $18.64

The difference between a plantwide predetermined overhead rate and an activity-based, is that the second one is more accurate. The allocation process is specific and more efficient.