Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs. Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved.
Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways. (Round answers to 2 decimal places, e. g. 12.25.)
WATERWAYS CORPORATION
Activity Cost
Pools Cost Drivers Estimated
Overhead Expected
Use of Cost
Drivers per
Activity Actual Use of
Drivers
Irrigation installation Labor cost $1,998,432 12,960 12,941
Machining (all machine use) Machine hours 1,670,400 33,408,000 33,409,000
Customer orders Number of orders 30,636 2,553 2,520
Design Cost per design 820 8 7
Selling Number of sales calls 350,400 21,900 22,100
WATERWAYS CORPORATION
Activity Cost
Pools Activity-
Based
Overhead
Rates Actual
Cost
Assigned
Irrigation installation $
$
Machining (all machine use)
Customer orders
Design
Selling
How would you classify each of the following activities by level—unit level, batch level, product level, or facility level?
Testing of products (if all items are tested)
BatchProductFacilityUnit
Testing of products (if all items are not tested)
BatchFacilityUnitProduct
Designing new products
FacilityUnitBatchProduct
Packaging
BatchProductFacilityUnit
Molding
FacilityUnitProductBatch
Assembling
UnitFacilityBatchProduct
Depreciation
ProductBatchFacilityUnit
Machine maintenance
UnitBatchProductFacility
Advertising
ProductUnitFacilityBatch
Equipment setups
ProductBatchFacilityUnit
Electricity required to run equipment
BatchProductFacilityUnit
Requisitioning materials
UnitProductFacilityBatch

WATERWAYS CORPORATION

a.

Activity Cost                        Overhead          Actual Cost  

Pools Activity-                       Rates                Assigned

Based  

Irrigation installation                $  154.20    $1,995,502.20

Machining (all machine use)        $0.05      1,670,450.00

Customer orders                        $12                30,240.00

Design                                         $102.50              717.50

Selling                                         $16             353,600.00

b. Classification of activities by level:

Activities                                                                  Levels

Testing of products (if all items are tested)            Unit

Testing of products (if all items are not tested)    Batch  

Designing new products                                        Product  

Packaging                                                                Unit  

Molding                                                                    Product  

Assembling                                                              Batch  

Depreciation                                                            Facility  

Machine maintenance                                            Unit  

Advertising                                                              Product  

Equipment setups                                                  Batch  

Electricity required to run equipment                   Facility  

Requisitioning materials                                        Unit

Explanation:

a) Data and Calculations:

WATERWAYS CORPORATION

Activity Cost                                       Estimated   Expected       Actual Use

Pools                            Cost Drivers  Overhead  Use of Cost     of Drivers

                                                                              Drivers per

                                                                                Activity    

Irrigation installation Labor cost      $1,998,432   12,960                   12,941

Machining                 Machine hours 1,670,400   33,408,000  33,409,000

Customer orders      No. of orders        30,636     2,553                   2,520

Design                      Cost per design         820             8                      7

Selling                       No. of sales calls 350,400    21,900               22,100

Overhead Rates:

Irrigation                 $1,998,432/12,960    = $154.20 per DLH

Machining                 1,670,400/33,408,000 = $0.05 per machine hour

Customer orders      30,636/2,553 = $12 per order

Design                       820/8 = $102.50 per design

Selling                         350,400/21,900 = $16 per sales call

Activity Cost                        Overhead          Actual Cost  

Pools Activity-                       Rates                Assigned

Based  

Irrigation installation                $  154.20    $1,995,502.20 ($154.20*12,941)

Machining (all machine use)        $0.05      1,670,450($0.05*33,409,000)

Customer orders                        $12                30,240 ($12*2,520)

Design                                         $102.50              717.50($102.50*7)

Selling                                         $16             353,600($16*22,100)

b) Levels of Activity:

Unit-level activities: At this level, the costs are concerned with direct materials, direct labor, and machine maintenance.

Product-level activities are specific to a product.

Batch‐level activities require a group (batch) of units to be produced or some processes performed together.

Facility-level activities are support activities required for the development and production of goods and services.  They are organization-wide.

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