Using Activity Based Costing to determine the cost per product

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Description

Requirement #1 – Using Activity Based Costing to determine the cost per product.

a.) Use Exhibit #4 to calculate the activity rates per each activity for the material related

overhead and the other overhead amounts.

b.) Use the rates you calculated in part a to calculate the total overhead applied to each

product. (You should use the activities in Exhibit 5. Where activity numbers have

been provided use the actual activity amounts not their percentages as the case

writers have rounded their percentages. For example use the number of transactions

4 + 25 + 100 = 129 transactions not 3% + 19% + 78%)

c.) Don’t forget to use the Material, Set up labor, and Direct labor, costs provided for

each product in Exhibit 4.

Requirement

Destin Brass Products
Harvard Business School Case #190-089
Case Software #XLS024
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard
Business School.

Exhibit 1

Product Profitability Analysis
Valves

Standard unit costs
Target selling price
Planned gross margin (%)
Last Month
Actual selling price
Actual gross margin

Pumps

Flow Controllers

$37.56
$57.78
35%

$63.12
$97.10
35%

$56.50
$86.96
35%

$57.78
35%

$81.26
22%

$97.07
42%

Exhibit 2

Monthly Product and Cost Summary

Product Lines

Valves

Pumps

Flow Controllers

Monthly production

7,500 units
(1 run)
7,500 units
(1 shipment)

12,500 units
(5 runs)
12,500 units
(7 shipments)

4,000 units
(10 runs)
4,000 units
(22 shipments)

Monthly shipments

Manufacturing Costs
Material

Total material
Labor ($16 per hour including employee
benefits)
Set-up labor
Run labor
Machine usage

Monthly Total
4 components
2 @ $2 = $ 4
2 @ 6 = 12
—
16

5 components
3 @ $2 = $ 6
2 @ 7 = 14
—
$20

10 components
4 @ $1 = $ 4
5 @ 2 = 10
1@8=8
$22

8 hours per
production run
.25 hours per unit
.50 hours per unit

8 hours per
production run
.50 hours per unit
.50 hours per unit

12 hours per
production run
.40 hours per unit
.20 hours per unit

$458,000

168 hours
9,725 hours
10,800 hours

Manufacturing Overhead
Receiving
Materials handling
Engineering
Packing and shipping
Maintenance
Total
Machine depreciation (units-of-production
method) $25 per hour of use

$20,000
200,000
100,000
60,000
30,000
$410,000
$270,000

Exhibit 3

Standard Unit Costs
Valves

Material
Direct labor
Overhead @ 439% ofdirect
labor $
Standard unit cost
Overhead
Machine depreciation
Set-up labor
Receiving
Materials handling
Engineering
Packing and shipping
Maintenance

Pumps Flow Controllers

$16.00
4.00
17.56

$20.00
8.00
35.12

$22.00
6.40
28.10

$37.56

$63.12

$56.50

$270,000
2,688
20,000
200,000
100,000
60,000
30,000
$682,688

Total run labor = 9,725 hours × $16 =
$155,600
Overhead rate

682,688
= 439%
155,600

Exhibit 4

Revised Unit Costs
Valves

Pumps

Flow Controllers

Material
$16.00
$20.00
Material overhead (48%)
7.68
9.60
Set-up labor
0.02
0.05
Direct labor
4.00
8.00
Other overhead (machine hour basis)
21.30
21.30
Revised standard cost
$49.00
$58.95
Material Related Overhead
Receiving
20,000
Materials handling
200,000
Total
$220,000
Overhead Absorption Rate
$220,000
= 48% (materials cost basis)
$458,000
Other Overhead
Machine depreciation
$270,000
Engineering
100,000
Packing and shipping
60,000
Maintenance
30,000
Total
$460,000
Overhead Absorption Rate
$460,000
= $42.59 per machine hour
10,800 hours

$22.00
10.56
0.48
6.40
8.52
$47.96

Exhibit 5

Monthly Overhead Cost Activity Analysis
Valves

Pumps

Flow Controllers

4 transactions
(3%)
4 transactions
(3%)

25 transactions
(19%)
25 transactions
(19%)

100 transactions
(78%)
100 transactions
(78%)

1 transaction
(3%)

7 transactions
(23%)

22 transactions
(73%)

20%

30%

50%

3,750 hours
(35%)

6,250 hours
(58%)

800 hours
(7%)

Receiving and Materials Handling:

Receive each component once per run
Handle each component once per run
Packing and Shipping:
One packing order per shipment
Engineering:
Estimated engineering work-order
percentage (subjective)
Maintenance:
Machine-hour basis

Using ABC
Activity Activity Cost Pool

Activity Rate Cost Driver

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