Activity Based Costing A

Activity Based Cosling A

Northwest Company produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports total overhead costs of $54,300 incurred by these two product lines. The company wants to apply activity-based costing (ABC) to allocate these overhead costs and determine if the cost per foot would change significantly from the current reported cost. The data collected includes overhead cost categories, their costs, and usage data by each product line. The overhead cost categories are supervision ($2,172), depreciation of machinery ($29,000), and assembly line preparation ($23,129). Usage data includes direct labor hours, machine hours, and setup counts for each product type.

The task is to assign the overhead costs to each product using ABC, then determine the average cost per foot for each product, and compare it to current costs.

Paper For Above instruction

Activity-based costing (ABC) provides a more accurate method of allocating overhead costs by assigning costs based on actual activities that consume resources. In the case of Northwest Company, applying ABC involves identifying the relevant activity cost pools, determining the cost drivers for each activity, and calculating the respective rates to allocate costs to products based on their usage of these drivers.

First, we allocate the overhead costs into their respective pools. The total overhead costs amount to $54,300, divided into supervision ($2,172), depreciation ($29,000), and assembly line preparation ($23,128). Since each activity has a distinct cost driver, we will allocate costs based on their respective drivers: direct labor hours, machine hours, and setup counts.

Supervision costs are driven by direct labor hours. The supervision cost of $2,172 is allocated based on each product line's direct labor hours: Rounded Edge (6,200 hours), Squared Edge (11,900 hours), and total (18,100 hours). The supervision rate per labor hour is calculated as:

Supervision Rate = Total supervision cost / Total direct labor hours = $2,172 / 18,100 hours ≈ $0.12 per hour.

For depreciation of machinery, which is driven by machine hours, the total depreciation cost of $29,000 is allocated using total machine hours (1,000 hours). The depreciation rate per machine hour is:

Depreciation Rate = $29,000 / 1,000 hours = $29 per machine hour.

Assembly line preparation costs are driven by setup counts. The total setup counts are the sum of setups for both products: Rounded Edge (31 setups), Squared Edge (93 setups), totaling 124 setups. The setup cost per setup is:

Preparation Rate = $23,128 / 124 setups ≈ $186.59 per setup.

Calculating overhead allocation for each product:

• Rounded Edge: supervision = 6,200 hours × $0.12 = $744.00; machinery = 300 hours × $29 = $8,700; setups = 31 × $186.59 ≈ $5,783.29; total overhead = $744 + $8,700 + $5,783.29 ≈ $15,227.29.
• Squared Edge: supervision = 11,900 hours × $0.12 = $1,428.00; machinery = 700 hours × $29 = $20,300; setups = 93 × $186.59 ≈ $17,370.87; total overhead = $1,428 + $20,300 + $17,370.87 ≈ $39,098.87.

Determine the overhead cost per foot for each product:

• Rounded Edge: Total overhead $15,227.29; Quantity produced 18,600 feet; Cost per foot = $15,227.29 / 18,600 ≈ $0.82
• Squared Edge: Total overhead $39,098.87; Quantity produced 31,700 feet; Cost per foot ≈ $1.23

Adding the overhead costs to the direct materials and labor costs (per foot), we obtain the total cost per foot for each product. This method reveals that activity-based costing provides a more detailed view of the costs and helps identify cost drivers contributing to overall expenses.

In conclusion, the ABC approach allocates overhead costs based on actual activities, leading to more precise product costing. This enhanced accuracy enables Northwest Company to make informed pricing and strategic decisions, potentially improving profitability by identifying areas where cost efficiencies can be achieved.

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