Bernie Company Makes Two Products: Wheels And Pedals

Bernie Company Makes Two Products Wheels And Pedals And Reports The F

Bernie Company manufactures two products, wheels and pedals, and reports various cost and production data. The company uses activity-based costing (ABC) to allocate overhead costs to these products. The data provided includes information on direct materials, direct labor hours, and overhead costs associated with different cost pools. The task involves calculating activity rates for each activity cost pool and determining the unit cost of each product by aggregating direct costs and allocated overhead costs.

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Bernie Company's approach to product costing provides an insightful illustration of activity-based costing (ABC), a method designed to allocate overhead more accurately than traditional costing methods. In this context, understanding the calculation process for activity rates and their application to determine unit costs is crucial for managerial decision-making, pricing strategies, and cost control.

Analysis of Cost Structure and Data

The company produces two distinct products—wheels and pedals—with differing manufacturing complexities. The production volumes are 10,000 units of wheels and 40,000 units of pedals annually. The per-unit direct labor hours are 0.8 hours for wheels and 0.4 hours for pedals. Direct material costs amount to $12 per unit for wheels and $8 per unit for pedals. The direct labor rate is $12 per hour. Notably, wheels require special processing, which influences the allocation of overhead costs associated with specific activities.

Calculating Activity Rates for Cost Pools

Activity-based costing segregates overhead costs into distinct pools, each associated with specific activities. For Bernie Company, two major overhead pools are identified: Number of machine setups and Machine hours for special processing, as well as a general overhead pool allocated based on direct labor hours.

1. Number of Machine Setups

The total estimated overhead for setup activities is $72, but there is additional confusion regarding the provided total overhead cost of $200,000 for machine-related activities. Assuming the setup overhead is $72, as the activity pool explicitly states, the activity rate for setups is calculated as:

Activity Rate (Setups) = Total setup overhead / Total number of setups

Given: Total setups = 5,000


Thus, Activity Rate = $72 / 5,000 setups = $0.0144 per setup

2. Machine Hours/Special Processing

The total overhead allocated to special processing is $200,000, and total machine hours dedicated to this activity are derived from the data. Since the total machine hours aren't explicitly provided for special processing, we infer that total machine hours relate to the activity pool. The activity rate per machine hour is calculated as:

Activity Rate (Special Processing) = Total overhead for special processing / Total machine hours

Total machine hours for wheels and pedals combined: 8,000 + 16,000 = 24,000 hours


Assuming the $200,000 overhead covers all processing, the rate is:


$200,000 / 24,000 hours = $8.33 per machine hour

3. General Overhead (Allocated Based on Direct Labor Hours)

The general overhead is allocated based on direct labor hours, with total estimated overhead of $816,000 and total direct labor hours of 8,000 (wheels) + 16,000 (pedals) = 24,000 hours. The activity rate for general overhead is:

Activity Rate (General Overhead) = Total general overhead / Total direct labor hours = $816,000 / 24,000 hours = $34 per hour

Calculating Unit Costs

Next, we analyze the unit costs by combining direct costs with allocated overheads using the activity rates. For each product, the costs include direct materials, direct labor, and overhead allocated through activity-based cost pools.

1. Direct Costs

  • Wheels: Material = $12, per unit
  • Pedals: Material = $8, per unit
  • Labor: Wheels = 0.8 hours $12 = $9.60; Pedals = 0.4 hours $12 = $4.80

2. Overhead Allocation

For wheels:

  • Setup overhead: Assuming each wheel requires one setup, the allocated setup overhead per wheel is:
  • $0.0144 per setup * number of setups per wheel. If each wheel involves one setup, then per unit: $0.0144

For pedals:

  • Similarly, if each pedal involves one setup:
  • $0.0144 per pedal

Special processing overhead applies to wheels only. Assuming each wheel undergoes 0.8 machine hours, the overhead allocated per wheel is:

  • $8.33 per machine hour * 0.8 hours = $6.66

Pedals do not require special processing, so they do not incur this overhead.

3. General Overhead

Allocated based on direct labor hours:

  • Wheels: 0.8 hours * $34 = $27.20
  • Pedals: 0.4 hours * $34 = $13.60

Total Unit Costs

Combining all costs:

  • Wheels:
    • Direct Material: $12
    • Direct Labor: $9.60
    • Setup Overhead: $0.0144
    • Special Processing: $6.66
    • General Overhead: $27.20

    Total cost per wheel = $12 + $9.60 + $0.0144 + $6.66 + $27.20 ≈ $55.48

  • Pedals:
    • Direct Material: $8
    • Direct Labor: $4.80
    • Setup Overhead: $0.0144
    • Special Processing: Not applicable
    • General Overhead: $13.60

    Total cost per pedal = $8 + $4.80 + $0.0144 + $0 + $13.60 ≈ $26.42

Conclusion

Through activity-based costing, Bernie Company can more precisely allocate overhead costs to its products. The calculated unit costs—approximately $55.48 for each wheel and $26.42 for each pedal—enable more accurate pricing, cost control, and profitability analysis. Implementing ABC facilitates better strategic decision-making by reflecting the true consumption of resources by each product, especially given the differing processing requirements.

References

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  • Turney, P. B. (2006). Activity-Based Management: Making Better Decisions. Wiley.
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