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A local picnic table manufacturer has budgeted overhead costs and is considering adopting ABC costing. They have estimated the cost drivers for each cost pool. Recent success has resulted in an order for 1,000 tables. Assuming direct labor costs are $20 per hour, determine the total cost of the order based on the activities and cost drivers provided.

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The adoption of Activity-Based Costing (ABC) in manufacturing firms provides a more precise allocation of overhead costs by emphasizing activities that drive costs rather than traditional broad-brush methods. In this scenario, a local picnic table manufacturer is evaluating its overhead costs and considering implementing ABC costing to allocate costs more accurately for a significant order of 1,000 tables. To determine the total cost of this job, it is necessary to analyze the estimated overhead costs, the identified cost drivers, and the direct labor cost per hour.

Activity-Based Costing (ABC) segregates overhead costs into specific pools associated with particular activities that consume resources. Each activity is then assigned a cost driver that measures the activity’s usage, such as machine hours, number of setups, or labor hours. The primary advantage of ABC is its accuracy in costing, which can assist in pricing decisions, cost control, and profitability analysis.

In this case, the manufacturer has identified certain activities linked to producing picnic tables. These activities likely include machining, assembling, finishing, quality inspection, and setup activities, each with its own estimated overhead costs and respective cost drivers. For example, the cost drivers for these pools might include machine hours, number of setups, or labor hours dedicated to each activity. Knowing these drivers allows for precise allocation of overhead to each unit of production, in this case, each table.

Calculating the cost per activity involves dividing the total overhead costs associated with each pool by the total estimated activity driver units. Once the cost per activity is known, it is multiplied by the actual activity units for the 1,000 tables to find the total overhead allocated for this order. Additionally, direct labor costs are calculated based on the hours required for each activity or per unit of production, with a fixed rate of $20 per hour.

For instance, suppose the overhead cost for machining is $50,000 with an estimated 2,500 machine hours; for assembling, $30,000 with 1,500 hours; finishing, $20,000 with 1,000 hours; and quality inspection, $10,000 with 500 hours. The cost per machine hour would be $20 for machining ($50,000 / 2,500 hours), and similarly for other activities. If the total activity units associated with the order are known, the overhead costs assigned can be accurately computed.

Furthermore, direct labor costs are determined by estimating the hours needed to produce 1,000 tables. If each table takes 0.5 hours of labor, total labor hours would be 500 hours, costing $10,000 at $20 per hour. This calculation includes labor costs in the total of the job costing.

Applying this methodology, the complete job cost for producing 1,000 picnic tables would include the sum of the allocated overhead costs plus direct labor. This comprehensive view provides insights into actual costs, allowing management to set appropriate sales prices, identify cost-saving opportunities, and enhance profitability analysis.

References

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