We're going to be looking at two different examples so we can get some
practice at performing activity-based costing. So our first example will be the
Longview Corporation and they're considering the use of activity-based
costing. We have the following information provided for the production
of two product lines. So we have product A and product B. We have the two
activities that these products go through, set up and machine maintenance,
and the estimated cost for each activity and the cost driver for each of those
activities. Then we're given direct labor hours, number of setups, and number
of machine hours for each product and a total cost or the total hours total,
total number of setups and total number of machine hours. Longview plans to
produce 350 units of product A and 225 units of product B and we need to
compute the activity-based costing indirect manufacturing cost per unit of
each product. So the first thing we have to do is just as before we have to go
through and we have to calculate a rate, an allocation rate. So that is step one
in the process for each activity. So the first activity is set ups and our
estimated cost per setup is $107,000. That's our
estimated cost. So you'll recall to calculate an allocation rate, we take
total estimated overhead and divide that by the total estimated allocation base.
They tell us that our allocation base for setups is the number of setups, so we
need to go find the total number of setups. Here is the number of setups
and the total number of setups is 100. So we're going to divide this $107,000 by
100 setups. That will give us $1070 per setup. The second activity is
machine maintenance. We see that our machine maintenance total estimated cost
is $50,000. So we'll put $50,000 and now we divide
that by the total estimated allocation base. They tell us that our allocation
base is machine hours so we need to go find our total number of machine hours
and we find that to be 5,000 machine hours. So if we do this simple math, we
find that maintenance is $10 per machine hour. Notice that no activity in
our system here uses direct labor hours as a cost driver. That's very important
to note because we don't even really need that information that they give us
here so be very careful when you're looking through this information to only
use the information that's needed. So the second step you'll recall in our process,
we calculated the rate, the second step in the process is to allocate the cost.
So in this process we have product A
and we have product B. So setups for product A:
We know our rate is $1,070 per setup so we need to figure out how many
setups product A took. Well we see right here that product A took 30 setups so
we're going to multiply 1,070 by 30 setups and that will give us a
cost for setups for product A of $32,100. For product B, the rate is still
$1,070, but product B had 70 setups so the total cost of product B is
estimated at $74,900. The second is maintenance.
The rate is $10 per machine hour. Product A took 1200 machine hours so the
cost allocated to product A for maintenance will be
$12,000. For product B the rate is still $10 per machine hour. Product B is
estimated to take 3800 hours, so the cost allocated to product B will be
$38,000. So the total estimated cost of product A will be
$44,100. They tell us in the problem that we
plan to produce 350 units of product A. So if we divide the 44,100 by 350
units we get a cost per unit of $126.
Product B's total cost is $112,900,
and the problem tells us that
we're going to produce or we plan to produce 225 units of product B. So we're
going to divide 112,900 by 225 and that will give us $501
$501.78 per unit.
So that's what we need to do when we're calculating a per unit cost for
each product. Now I'll let you take a shot at a problem and see how you can do.
So we'll take Monthly Corporation. They make two products C and D. The following
data have been summarized, so again we're given cost data on a per unit basis and
then they're giving us the activities and the allocation rate. So remember step
one is to calculate the allocation rate. Well they've actually already done step
one for us. They've calculated the allocation rate. Then they give us
our allocation base units for product C and product D. The company plans to
manufacture 225 units of each product. Calculate the product cost per unit for
product C and D using activity-based costing. So press pause on your player
now and attempt to solve this problem and then once you have figured it out
play the movie back the lecture back and we'll look at it together. Okay so
hopefully you have come up with a solution to the problem. So again part
one the step one out of calculating an allocation rate has already been done
for us so we just are going to start with Part two which is allocating the
cost. So we'll start with product C and
we see that setups the allocation rate is $1,000 and it is based on number of
setups and we see that product C took 37 setups so we will multiply that times 37
and that will give us $37,000 for product C for setups.
Then we have machine maintenance and we see that our
allocation rate is $11 and
that would likely be per machine hour and they tell us that product C had
1350 so 1350 gives us a cost of $14,850
$14,850 for a total cost estimated cost product C of $51,850
$51,850 and we plan to produce 225
225 units gives us a cost per unit for product C of $230.44
$230.44. We will do the same thing with product D. So for
setups our rate is still $1,000. Product D will utilize 77
setups. So multiply that times 77, that will give us a cost of
$77,000. Maintenance is $11 per machine hour,
$3,850 that maintenance will use. That will give us a cost of $42,350
$42,350 for a total cost estimated cost to product D
of $119,350. Again they tell us we plan to
produce 225 units of each product so we'll divide D's
estimated total cost by 225 units.
That will give us a cost estimated cost per unit for product D of
$530.44. Now notice this this problem is asking
us to calculate the product cost per unit. This is only the overhead cost per
unit or the indirect cost per unit. So they're wanting these all we've found so
far is these two numbers. That's not what they're asking for here. They're asking
for the total product cost of each unit which as we know is materials, labor, and
overhead combined. So make sure in all these problems that you're
answering the question that's being asked. So product C has $900 for
materials, $400 for labor, and we just found $230.44
$230.44 for overhead for a total cost of $1530.44
$1530.44. For product D we had 2,100 for materials, 200 for
labor, and we just found our overhead or our indirect cost to be
$530.44 for a total cost to product D of
$2,830.44. So this would be the answer
that the problem is is looking for would be the total cost here.
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