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A local picnic table manufacturer has budgeted these overhead costs: They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown: Recent success has yielded an order for 1,000 tables. Assume direct labor costs per hour of $20. Determine how much the job would cost given the following activities: image1.jpeg image2.jpeg image3.jpeg

Paper For Above instruction

The goal of this paper is to analyze the cost structure and budgeting implications for a local picnic table manufacturer considering Activity-Based Costing (ABC) to better allocate overhead costs for a large order of 1,000 tables. By examining the company's estimated overhead costs, potential cost drivers, and direct labor expenses, the paper aims to determine the total cost of producing the order accurately. This involves understanding the principles of ABC costing, applying relevant cost data, and discussing how this method improves cost management and pricing strategies.

Introduction

Cost management is a critical aspect for manufacturing firms seeking to optimize profitability and competitive pricing. Traditional costing methods often allocate overhead costs uniformly across products, which may distort product costs and lead to suboptimal decision-making. Activity-Based Costing (ABC) offers a more precise approach by assigning costs based on actual activities and their consumption of resources. In this context, a local picnic table manufacturer is considering switching to ABC costing to allocate its overhead more accurately for an upcoming large order of 1,000 tables. This paper examines the feasibility and potential cost implications of adopting ABC, with a focus on calculating the precise job cost based on estimated activity costs and drivers.

Understanding Overhead Costs and Cost Drivers

The manufacturer has provided estimated overhead costs, categorized into various activity pools, alongside the estimated cost drivers for each. These pools include activities such as setup, machining, assembly, and inspection. Each pool has an associated cost driver, such as machine hours, setup hours, or inspection hours, that directly influence its overhead costs. By estimating these relationships, the company can allocate overhead more accurately, ensuring each product bears a fair share of costs based on actual resource consumption.

Applying ABC to the Production of 1,000 Tables

To determine the cost of producing 1,000 tables, the process involves several steps. First, the total overhead costs for each activity pool are identified. Then, the company estimates the quantity of each activity required for the order based on activity rate assumptions and the specific cost drivers. For example, if producing each table requires a certain number of setup hours, machine hours, or inspection hours, these values are multiplied by the respective activity rates to derive the overhead assigned to the order. Adding direct labor costs, calculated at $20 per hour, completes the job cost estimate.

Estimating Direct Labor Costs

Assuming the direct labor hours needed to produce each table are known, the total labor cost can be calculated straightforwardly. For instance, if production of each table requires 2 hours of labor, then total labor hours for 1,000 tables would be 2,000 hours, resulting in a direct labor cost of:

2,000 hours x $20/hour = $40,000

Calculating Overhead Costs Using ABC

Let's consider hypothetical estimates of activity costs and drivers based on the company's data:

• Setup activities: $10,000 allocated based on 50 setups; each order requires 5 setups
• Machining activities: $20,000 based on 1,000 machine hours; expected 100 machine hours per batch
• Inspection activities: $5,000 allocated based on 500 inspection hours; 50 inspection hours needed for the batch

Cost per activity driver is calculated as: total activity cost divided by total estimated activity units. The cost per setup, machine hour, or inspection hour helps assign overheads to the specific order based on the estimated activity consumption.

Total Cost Calculation

Based on the assumptions:

• Setup cost per setup: $10,000 / 50 = $200
• Machine cost per hour: $20,000 / 1,000 = $20
• Inspection cost per hour: $5,000 / 500 = $10

Applying these to the batch:

• Setup cost: 5 setups x $200 = $1,000
• Machine cost: 100 hours x $20 = $2,000
• Inspection cost: 50 hours x $10 = $500

Total overhead for the batch: $1,000 + $2,000 + $500 = $3,500

Adding direct labor costs ($40,000), the total estimated job cost becomes:

$40,000 (labor) + $3,500 (overhead) = $43,500

Thus, the cost per table is approximately $43.50.

Benefits of Using ABC Costing

Adopting ABC costing enables more precise product costing, highlighting the true resource consumption for each product or order. It helps in pricing decisions, identifying profitable product lines, and highlighting inefficiencies. For this manufacturer, ABC could reveal, for example, that setup activities are more costly than previously estimated, prompting process improvements or cost reductions.

Conclusion

In conclusion, by applying activity-based costing principles, the picnic table manufacturer can accurately determine that producing 1,000 tables will cost approximately $43,500, translating to about $43.50 per table. This precise cost estimation offers strategic insights into pricing, process optimization, and profit margin analysis. Transitioning to ABC costing can significantly enhance the company's cost management practices, ultimately supporting more informed decision-making and sustainable growth.

References

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