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Outside Activity Activity Based Costingyou Want To Determine How The

Identify the assignment task: You need to estimate the total labor cost for Product A by allocating wages for four employees using activity-based costing (ABC) principles. The employees' wages vary in terms of pay structure and how they are allocated to products: one employee is paid hourly and directly assigned, while others are paid a fixed salary or work across multiple products with costs allocated based on specific activities such as repairs, design changes, and direct labor hours. The goal is to calculate Product A's total labor cost for the upcoming year, considering the provided wage rates, activity levels, and estimated work hours.

Paper For Above instruction

Activity-Based Costing (ABC) offers a robust framework for accurately allocating overheads and labor costs to specific products based on their usage of various activities. In the manufacturing environment, understanding the precise cost contributions of labor to each product is essential for pricing, profitability analysis, and strategic decision-making. This paper aims to determine the total labor cost for Product A by applying ABC principles to allocate the wages of four employees—Joe Bog, Norma Jean, Bill Blass, and Sam Hill—based on their work patterns and activity levels.

First, it is necessary to understand each employee's wage structure and their respective roles in the production process. Joe Bog is paid $10 per hour and assembles Product A directly, making his wages entirely attributable to Product A. Norma Jean, a mechanic, earns $12 per hour, and her annual wages amount to an estimated $24,000. She performs repairs on machinery, which are allocated according to the number of repairs, with 50 repairs projected for Product A out of a total of 300 repairs. Bill Blass, a designer, earns $20 per hour, with annual earnings estimated at $40,000, and his activities are allocated based on the number of design changes, of which 20 are for Product A out of 400 total changes. Sam Hill, a production supervisor, earns a fixed monthly salary of $3,000, translating to an annual salary of $36,000, and his time is allocated based on direct labor hours, with a total of 10,000 hours planned for the year.

Using ABC, the first step involves allocating Joe Bog's wages directly to Product A because he is involved solely in assembling Product A. His annual wages are calculated as:

  • Joe Bog: $10/hour 50 hours/week 52 weeks = $26,000

Since Joe’s wages are directly attributable to Product A, this amount is fully assigned to the product.

Next, Norma Jean’s wages are to be allocated based on repairs. Her estimated annual wages are $24,000, and she expects to perform 300 repairs, with 50 on Product A. The cost per repair is:

  • Cost per repair = $24,000 / 300 repairs = $80 per repair

Therefore, the wages allocated to Product A through Norma Jean’s repairs are:

  • 50 repairs * $80 = $4,000

Bill Blass’s wages are to be allocated based on design changes. His total estimated wages are $40,000, with 20 design changes for Product A out of 400. The cost per design change is:

  • Cost per design change = $40,000 / 400 = $100 per change

Wages allocated to Product A via Bill Blass’s design changes amount to:

  • 20 changes * $100 = $2,000

Finally, Sam Hill’s wages are allocated based on direct labor hours. The total hours for the year are estimated at 10,000. Assuming that Product A consumes a proportionate share of these hours, it is necessary to estimate the hours attributable to Product A. Typically, direct labor hours dedicated solely to Product A are used, but since only Joe Bog's hours are directly assigned, and his contribution is 50 hours/week, total hours for Joe are:

  • 50 hours/week * 52 weeks = 2,600 hours/year

Because the problem context suggests that only Joe's hours are directly for Product A, and the total labor hours are 10,000, we can allocate Sam Hill’s wages based on the proportion of Joe’s hours to total labor hours:

  • Proportion of Joe’s hours to total labor hours = 2,600 / 10,000 = 0.26

Sam Hill’s wages per hour are:

  • $3,000/month * 12 months = $36,000 total / 10,000 hours = $3.60 per hour

Wages allocated to Product A via Sam Hill are thus:

  • 0.26 * $36,000 = $9,360

Summing all components, the total labor cost for Product A includes:

  • Joe Bog: $26,000
  • Norma Jean: $4,000
  • Bill Blass: $2,000
  • Sam Hill: $9,360

The total estimated labor cost for Product A for the upcoming year is:

$41,360

This comprehensive approach ensures that each employee’s wages are allocated based on their specific activities related to Product A, aligning with the principles of activity-based costing. Such precise cost allocation provides better insights into the true costs of manufacturing products, aiding in strategic decision-making, pricing, and profitability analysis.

References

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