5-32
(30 min.) Plantwide versus department overhead cost rates.
1.
Molding
Manufacturing department overhead
Service departments:
Power
Maintenance
Total budgeted plantwide overhead
$21,000
Amounts
(in thousands)
Component
Assembly
$16,200
$22,600
Budgeted direct manufacturing labor-hours (DMLH):
Molding
Component
Assembly
Total budgeted DMLH
Plantwide overhead rate =
=
2.
Total
$59,800
18,400
4,000
$82,200
500
2,000
1,500
4,000
Budgeted plantwide overheard
Budgeted DMLH
$82,200
= $20.55 per DMLH
4,000
The department overhead cost rates are shown in Solution Exhibit 5-32
3.
MumsDay Corporation should use department rates to allocate plant overhead because:
(1) the cost drivers of resources used in each department differ and (2) the departments do not
use resources from the support departments in the same proportion. Hence, department rates
better capture cause-and-effect relationships at MumsDay than does a plantwide rate.
4.
MumsDay should further subdivide the department cost pools into activity-cost pools if
(a) significant costs are incurred on different activities within the department, (b) the different
activities have different cost drivers, and (c) different products use different activities in different
proportions.
Budgeted Rate (Budgeted overhead ÷ Alloc. Base)
2 (b) Allocation Base
Total budgeted overhead of manufacturing
departments
2 (a)
Departmental overhead costs
Allocation of maintenance costs (direct method)
$4,000 × 90/125, 25/125, 10/125
Allocation of power costs
$18,400 × 360/800, 320/800, 120/800
2,760
SOLUTIO' EXHIBIT 5-32
$
0
(18,400)
$18,400
$
0
2,880
(4,000)
$36.75/MH
875 MH
$32,160
8,280
$21,000
$4,000
1,500 DMLH
$25,680
7,360
320
$22,600
Assembly
$12.18/DMLH $17.12/DMLH
2,000 DMLH
$24,360
800
$16,200
Departments (in thousands)
Service
Manufacturing
Power
Maintenance
Molding
Component
5-33
(40 min.) Activity-based costing, unused capacity.
1.
Simple Costing System
Number of units
Direct manuf. labor hours (DMLH) per unit
Cost per DMLH
Basca
30,000
Thermo
15,000
2
2.5
60,000
37,500
$20
Total DMHL (30,000 × 2; 15,000 × 2.5)
Total indirect costs to be allocated
($3,000,000 + $600,000 + $582,000 +
$900,000 + $90,000 + $315,000 + $390,000)
Indirect cost rate per DMLH
($5,877,000 ÷ 97,500 DMLH)
Total
97,500
$5,877,000
$60.2769
Allocated indirect costs
($60.2769 × 60,000; 37,500)
Direct material cost per unit
Direct manuf. labor cost per unit
($20 per DMLH × 2 DMLH/unit;
2.5 DMLH/unit)
Indirect cost per unit
($3,616,615 ÷ 30,000; $2,260,385 ÷ 15,000)
Total cost per unit
5-3
$3,616,615
$2,260,385
$100.00
$150.00
40.00
50.00
120.55
150.69
$260.55
$350.69
ABC System
Material
handling hours
Machine hours
No. of shipments
Cu. ft. of motors
delivered
DML hours
Material handling (0.20 hours per load
× 55 loads per batch × (30,000 ÷ 500)
batches; 0.20 × 75 × (15,000 ÷ 100))
Manuf. operations (cost driver
consumption given)
Shipping (cost driver consumption given)
Distribution (1 cu. ft. per motor × 30,000
motors; 1.5 × 15,000)
Administration (see requirement 1)
Total indirect costs
Setup hours
Cost
Driver
(2)
No. of changed
components
Setups ((30,000 units ÷ 500 units per
batch) × 10 hrs. per batch; (15,000
÷ 100) × 16)
Activity
(1)
Design (cost driver consumption given)
2.
$5,877,000
390,000
315,000
90,000
3,000,000
582,000
600,000
Total cost of
activity
(given)
(3)
$ 900,000
5-4
60,000
30,000
120
45,000
660
600
37,500
22,500
180
30,000
2,250
2,400
Cost Driver Units
Consumed during
2006 (see (1))
Basca
Thermo
(4)
(5)
10
20
97,500
52,500
300
75,000
2,910
3,000
Total
(6) = (4) + (5)
30
$4
$6
$300
$40
$200
$200
per direct
manuf. labor
hour
per cubic foot
per shipment
per machine
hour
per materialhandling hour
per setup hour
Cost Allocation Rate for
Activity
(7) = (3) ÷ (6)
$30,000
per changed
component
30,000
Cost Description
Direct Costs
Direct materials ($100 × 30,000; $150 × 15,000)
Direct manufacturing labor
($20/hr. × 60,000 hrs.; $20/hr. × 37,500 hrs.)
Total direct costs
Indirect Costs of Activities
Design
Basca, 10 parts-sq. ft. × 30,000
Thermo, 20 parts-sq. ft. × 30,000
Setup
Basca, 600 setup hours × $200
Thermo, 2,400 setup-hours × $200
Materials handling
Basca, 660 hrs. × $200
Thermo, 2,250 hrs. × $200
Manufacturing operations
Basca, 45,000 machine-hour s × $40
Thermo, 30,000 machine-hours × $40
Shipping
Basca, 120 shipments × 300
Thermo, 180 shipments × 300
Distribution
Basca, 30,000 cubic feet delivered × $6
Thermo, 22,500 cubic feet delivered × $6
Administration
Basca, 60,000 dir. manuf. labor-hours × $4
Thermo, 37,500 dir. manuf. labor-hours × $4
Total indirect costs allocated
Total Costs
Total
(1)
15,000
Basca Units
per Unit
(2) = (1) ÷ 30,000
Thermo Units
Total
per Unit
(4) = (3) ÷ 15,000
(3)
Total
(5) = (1) + (3)
$3,000,000
$100.00
$2,250,000
$150.00
$ 5,250,000
1,200,000
4,200,000
40.00
140.00
750,000
3,000,000
50.00
200.00
1,950,000
7,200,000
300,000
10.00
600,000
40.00
480,000
32.00
450,000
30.00
1,200,000
80.00
54,000
3.60
135,000
9.00
150,000
3,069,000
$6,069,000
10.00
204.60
$404.60
4.00
120,000
132,000
4.40
1,800,000
60.00
36,000
1.20
180,000
240,000
_________
2,808,000
$7,008,000
6.00
8.00
_______
93.60
$233.60
900,000
600,000
582,000
3,000,000
90,000
315,000
390,000
5,877,000
$13,077,000
3.
Cost per unit
Simple system
Activity-based Cost System
Activity-based cost as % of original
Basca
$260.55
$233.60
90%
Thermo
$350.69
$404.60
115%
The simple and activity-based costs per unit differ because the pattern of consumption of direct
manufacturing labor-hours (the indirect cost driver in the simple system) is very different from
the pattern of consumption of the six new cost drivers by Basca and Thermo products. In
particular, using the new activity-based cost drivers, we see that Thermo consumes significantly
more of design, setup, material handling and shipping resources. This is driven by the fact that
Thermo has more change components, smaller batch sizes, larger number of components and a
greater number of smaller-size shipments than Basca. In the ABC analysis Thermo is therefore
more costly per unit than in the simple system. These differences are important to Bronco
Electric because it can use the information to price the motors based on their consumption of
resources, and also, it can use the activity-consumption information to reduce costs and to
optimize its operations for maximum value-added from indirect resources.
5-5
4.
Number of units
Old cubic feet per motor
New cubic feet per motor
Basca
30,000
Thermo
15,000
1
1.5
0.9
1.2
Total
$315,000
Distribution costs
Distribution capacity in cu. ft.*
(30,000 motors × 1 cu. ft. per motor;
15,000 × 1.5)
30,000
22,500
Distribution cost per cu. ft.
($315,000 ÷ 52,500)
52,500
$
Cu. ft. of distribution capacity used
(30,000 motors × 0.9 cu. ft. per motor;
15,000 × 1.2)
Cost of distribution resources consumed
(27,000 cu. ft. × $6/cu. ft.; 18,000 × 6)
Excess distribution capacity
($315,000 – $270,000)
6.00
27,000
18,000
45,000
$162,000
$108,000
$270,000
$ 45,000
* We are given that Bronco’s distribution system was operating at capacity at the old number of
units and old cu. ft. per motor.
5.
In the short run, Bronco can try to sell the excess distribution capacity of 7,500 (52,500 –
45,000) cu. ft. (costing $45,000) to other businesses. In the long run, Bronco should focus on
reducing bulkiness of shipments as much as possible and minimizing or eliminating excess
distribution capacity, to match the demand for distribution resources.
5-6