You Are The New Production Manager Of A Small Manufacturing

You Are The New Production Manager Of A Small Manufacturing Company B

You are the new production manager of a small manufacturing company, Baseball Products, Inc., located in Littletown, Montana. The company manufactures two primary products: baseball bats and baseball gloves. Your task is to implement ABC Costing to allocate overhead costs associated with these products. You need to design an ABC report to present to management, showing the allocation of overhead costs to Bats and Gloves and demonstrating that the allocation is correct. To do this, you have been provided with data on activities involved in manufacturing the products over a week, including activity levels and overhead costs per activity.

Paper For Above instruction

Introduction

Activity-Based Costing (ABC) provides a more accurate method for allocating overhead costs by assigning them based on the actual activities that drive costs. Unlike traditional costing systems that might allocate overhead based on a single metric like direct labor hours or machine hours, ABC considers multiple activities and their specific usage by each product. Implementing ABC in Baseball Products, Inc., will enable better insight into the true costs of manufacturing baseball bats and gloves, aiding in pricing, budgeting, and strategic decision-making.

Data Overview

The provided data includes weekly activity levels for each product, with Activity-Based Costing activities and associated overhead costs:

  • Set-Ups: Bats - 2; Gloves - 4; Overhead: $600
  • Machining: Bats - 150 hours; Gloves - 350 hours; Overhead: $7,500
  • Receiving: Bats - 30 receipts; Gloves - 70 receipts; Overhead: $3,000
  • Packing: Bats - 250 deliveries; Gloves - 550 deliveries; Overhead: $16,000
  • Engineering: Bats - 400 hours; Gloves - 600 hours; Overhead: $22,000

Total overhead costs across all activities amount to $49,100.

Step 1: Identify Activity Cost Pools and Cost Drivers

Each activity represents a cost pool, with specific cost drivers:

  • Set-Ups: number of setups
  • Machining: machine hours
  • Receiving: number of receipts
  • Packing: number of deliveries
  • Engineering: engineering hours

These drivers directly influence the overhead costs for each activity.

Step 2: Calculate Activity Rates

Activity rate is computed as the total overhead for each activity divided by the total activity units:

Set-Up Rate = $600 / (Total Set-Ups)

Machining Rate = $7,500 / (Total Machining Hours)


Receiving Rate = $3,000 / (Total Receipts)


Packing Rate = $16,000 / (Total Deliveries)


Engineering Rate = $22,000 / (Total Engineering Hours)

Calculating total activity levels:

- Set-Ups: 2 + 4 = 6

- Machining: 150 + 350 = 500 hours

- Receipts: 30 + 70 = 100

- Deliveries: 250 + 550 = 800

- Engineering: 400 + 600 = 1000 hours

Therefore:

- Set-Up Rate = $600 / 6 = $100 per setup

- Machining Rate = $7,500 / 500 hours = $15 per hour

- Receiving Rate = $3,000 / 100 receipts = $30 per receipt

- Packing Rate = $16,000 / 800 deliveries = $20 per delivery

- Engineering Rate = $22,000 / 1,000 hours = $22 per hour

Step 3: Allocate Overhead Costs to Products

Multiply activity rates by the activity levels for each product:

Baseball Bats:

- Set-Ups: 2 × $100 = $200

- Machining: 150 hours × $15 = $2,250

- Receiving: 30 receipts × $30 = $900

- Packing: 250 deliveries × $20 = $5,000

- Engineering: 400 hours × $22 = $8,800

Total Overhead for Bats: $200 + $2,250 + $900 + $5,000 + $8,800 = $17,150

Baseball Gloves:

- Set-Ups: 4 × $100 = $400

- Machining: 350 hours × $15 = $5,250

- Receiving: 70 receipts × $30 = $2,100

- Packing: 550 deliveries × $20 = $11,000

- Engineering: 600 hours × $22 = $13,200

Total Overhead for Gloves: $400 + $5,250 + $2,100 + $11,000 + $13,200 = $31,950

The sum of allocated overheads is $17,150 (Bats) + $31,950 (Gloves) = $49,100, matching the total overhead cost, confirming the accuracy of the allocation.

Conclusion

Implementing ABC costing has allowed a more precise allocation of overhead costs between baseball bats and gloves in Baseball Products, Inc. This method reveals that gloves incur significantly more overhead due to higher activity levels, especially in machining and packing. Understanding these cost drivers enables better pricing strategies, cost control, and resource allocation. For management, adopting ABC provides a basis for more informed decision-making related to product profitability, process improvements, and operational efficiency.

References

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