Activity Rates Pattern Company Uses Activity Based Costing (

Activity Ratespatten Company Uses Activity Based Costing Abc Patten

Activity Ratespatten Company uses activity-based costing (ABC). Patten manufactures toy cars using two activities: plastic injection molding and decal application. Patten's 20X1 total budgeted overhead costs for these two activities are $492,000 for injection molding and $196,000 for decal application. Molding overhead costs are driven by the number of pounds of plastic that are molded together. Decal application overhead costs are driven by the number of decals applied to toys.

The budgeted activity data for 20X1 are as follows:

  • Pounds of plastic molded: 1,940,000
  • Number of decals applied: 197,000

Required:

1. Calculate the activity rate for the plastic injection molding activity. Round your answer to the nearest cent. (Fill in the blank 1 of 1: $ per pound molded)

2. Calculate the activity rate for the decal application activity. Round your answer to the nearest cent. (Fill in the blank 1 of 1: $ per decal applied)

Comparing ABC and Plantwide Overhead Cost Assignments at Castle Dale Company

The controller identified two activities and their budgeted costs: setting up equipment ($660,000) and other overhead ($2,376,000). Setting up equipment is based on setup hours, and other overhead is based on oven hours. Castle Dale produces two products, Fudge and Cookies. The information is as follows:

  • Fudge: 16,000 batches, 12,000 setup hours, 2,200 oven hours
  • Cookies: 890,000 batches, 3,000 setup hours, 15,400 oven hours

Required:

1. Calculate the activity rate for:

  • (a) Setting up equipment
  • (b) Other overhead

2. How much total overhead is assigned to Fudge using ABC?

3. What is the unit overhead assigned to Fudge using ABC? Round to the nearest cent.

4. Ignore ABC results and calculate the plantwide overhead rate, based on oven hours. Round to the nearest cent.

5. How much total overhead is assigned to Fudge using the plantwide overhead rate?

6a. The difference in the total overhead assigned to Fudge is different under the ABC system and non-ABC system because:

  • Different treatment of setup costs.
  • Difference in the batches produced.
  • Difference in the sale prices of the products.
  • Different oven temperatures required for baking fudge and cookies.

6b. What is the difference in total overhead assigned to Fudge under the two methods?

Paper For Above instruction

This paper aims to conduct a comprehensive analysis of Activity-Based Costing (ABC) using the scenarios provided for Patten Company and Castle Dale Company. The focus will be on calculating activity rates, analyzing overhead assignments, and understanding the differences between ABC and traditional plantwide costing methods. The analysis emphasizes the importance of accurate cost allocation for managerial decision-making and operational efficiency.

Cost Calculation for Patten Company

Patten Company employs ABC to allocate overhead costs to manufacturing activities — specifically, plastic injection molding and decal application. The total budgeted overhead costs are provided as $492,000 for molding and $196,000 for decal application. The primary cost drivers are pounds of plastic molded and decals applied, respectively. To determine the activity rates:

  • For plastic injection molding: Activity rate = Total overhead for molding / Pounds of plastic molded
  • For decal application: Activity rate = Total overhead for decal application / Number of decals applied

Calculations for the activity rates are as follows:

1. Plastic injection molding activity rate: $492,000 / 1,940,000 pounds = $0.2536 per pound

2. Decal application activity rate: $196,000 / 197,000 decals = $0.9949 per decal

These rates provide the basis for assigning overhead costs to products based on the respective activity drivers, leading to more accurate product costing.

Overhead Allocation Using ABC at Castle Dale

Castle Dale's overhead costs include $660,000 for setup activities and $2,376,000 for other overheads. These costs are allocated based on setup hours and oven hours:

  • Activity rate for setup = Total setup overhead / Total setup hours
  • Activity rate for other overhead = Total other overhead / Total oven hours

Calculating total setup hours:

  • Fudge: 12,000 hours
  • Cookies: 3,000 hours

Total setup hours = 12,000 + 3,000 = 15,000 hours; Activity rate for setup:

$660,000 / 15,000 hours = $44 per setup hour.

Calculating total oven hours:

  • Fudge: 2,200 hours
  • Cookies: 15,400 hours

Total oven hours = 2,200 + 15,400 = 17,600 hours; Activity rate for other overhead:

$2,376,000 / 17,600 hours = $135 per oven hour.

Overhead Allocation to Fudge and Comparison

Using ABC, the overhead allocated to Fudge is:

Overhead from setup activity: 12,000 hours * $44 = $528,000

Overhead from oven activity: 2,200 hours * $135 = $297,000

Total overhead allocated to Fudge: $528,000 + $297,000 = $825,000

Unit overhead per Fudge unit (per batch):

$825,000 / 16,000 batches = $51.56 per batch.

Ignoring ABC, the plantwide overhead rate based solely on oven hours is:

$2,376,000 / 17,600 oven hours = $135 per oven hour.

Overhead assigned to Fudge using plantwide rate:

2,200 hours * $135 = $297,000.

Analysis of Differences

The divergence in overhead costs assigned to Fudge between ABC and traditional methods stems from the different approaches to allocating setup and processing costs. ABC allocates costs based on actual activities and cost drivers, resulting in a more precise distribution. The plantwide rate, which uses a single allocation base (oven hours), tends to oversimplify complex production processes and can misallocate costs.

Specifically, the difference in total overhead assigned to Fudge is $825,000 (ABC) - $297,000 (plantwide) = $528,000. This substantial discrepancy highlights how ABC better captures the resource consumption of Fudge manufacturing, preventing cost distortion that could arise from the use of a uniform overhead rate.

Conclusion

Accurate overhead costing is crucial for effective managerial decision-making. ABC provides a detailed approach that considers specific activities, leading to more accurate cost allocation. As demonstrated, the significant differences in overhead assignment between ABC and traditional methods emphasize the need for companies to adopt activity-based costing, especially in diverse manufacturing environments, to improve costing accuracy, pricing strategies, and profitability analysis.

References

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