The Columbus Company produces only two products: a major computer part and

ACTIVITY-BASED COSTING PROBLEM Contrasting Traditional Costing &Activity-Based Costing The Columbus Company produces only two products: a major computer part and cell phones. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products. The company expects to produce 4,000 computer parts and 2,000 cell phones in 1999. Each computer part requires two direct labor hours to produce and each cell phone requires one-half hour to produce. The direct material and direct labor costs included in the two products are as follows: Computer Part $30 Iterm Cell-Phone $17 Direct Material (per Direct Laboe (per unit) Budgeted Estimated OverheadVolume Activity $80,000 20 Material Handli 5,000 lbs Packaging and Shi $120,0006,000 boxes Total Factory Overhead$270,000 Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 1999: Activity Computer Cell Overall 20 Material Handlin 1,000 lbs. 4,000 lbs.5,000 lbs. Packagi and Shi 4,000 boxes 2,000 boxes6000 boxes Required: 1. Calculate the cost of each product using a plant-wide rate based on direct labor hours 2. Calculate the activity cost rates for (a) setups, (b) material handling and (c) packaging and shipping 3. Cost out the two products using an activity-based costing system.

The Columbus Company produces only two products: a major computer part and cell phones. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products. The company expects to produce 4,000 computer parts and 2,000 cell phones in 1999. Each computer part requires two direct labor hours to produce and each cell phone requires one-half hour to produce. The direct material and direct labor costs included in the two products are as follows: Budgeted (Estimated) Total Factory Overhead Data For 1999: Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 1999: Required: 1. Calculate the cost of each product using a plant-wide rate based on direct labor hours. 2. Calculate the activity cost rates for (a) setups, (b) material handling and (c) packaging and shipping. 3. Cost out the two products using an activity-based costing system.

Expert Answer

Total Cost has three parts – a) Direct Material, b) Direct labor, and c) Overheads.

1.

In this portion of the problem, we will divide the total overhead on the basis of the direct labor hours consumed by each of the two products –

Computer
Part
Cell
Phone
Direct labor hours per unit 2 0.5
Volume 4000 2000
Total labor hrs 8000 1000
Overhead consumed $240,000 $30,000
Overhead consumed per unit $60 $15

Calculations

Computer
Part
Cell
Phone
Direct labor hours per unit 2 0.5
Volume 4000 2000
Total labor hrs =4000*2=8000 =2000*0.5=1000
Overhead consumed =270000*8/9 =270000*1/9
Overhead consumed per unit =240000/4000 =30000/2000

Combining this with the given direct material and direct labor cost per unit, we get –

Item Computer
Part
Cell
Phone
Direct material (per unit) $30 $17
Direct labor (per unit) $16 $4
Overhead consumed per unit $60 $15
Cost per unit $106 $36

2.

The overhead costs under different heads can be apportioned to the two products using the given cost drivers. THis is shown in the following table –

Activity Computer
Part
Cell
Phone
Total
Production setups $20,000 $60,000 $80,000
Material handling $14,000 $56,000 $70,000
Packing & shipping $80,000 $40,000 $120,000
Total overhead $114,000 $156,000 $270,000

Calculations

Activity Computer
Part
Cell
Phone
Production setups =80000*5/20 =80000*15/20
Material handling =70000*1/5 =70000*4/5
Packing & shipping =120000*4/6 =120000*2/6

Dividing this by the respective volumes, we get the overhead cost per unit –

Activity Computer
Part
Cell
Phone
Total overhead $114,000 $156,000
Overhead cost/ unit $28.50 $78.00

3.

The cost per unit as per ABC is shown below –

Item Computer
Part
Cell
Phone
Direct material (per unit) $30 $17
Direct labor (per unit) $16 $4
Overhead consumed per unit $28.5 $78.0
Cost per unit $74.5 $99.0
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