Chapter 17: Q3DQ (page 787)
Why are direct labor hours and machine hours commonly used as the bases for overhead allocation?
The more direct labor hours worked, the higher the overhead costs.
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The chief executive officer (CEO) of your company recently returned from a luncheon meeting
where activity-based costing was presented and discussed. Though her background is not in accounting, she has worked for the company for 15 years and is thoroughly familiar with its operations. Her impression of the presentation about ABC was that it was just another way of dividing up total overhead cost and that the total would still be the same “no matter how you sliced it.”
Required
Write a memorandum to the CEO, no more than one page, explaining how ABC is different from traditional volume-based costing methods. Also, identify its advantages and disadvantages vis-à-vis traditional methods. Be sure it is written to be understandable to someone who is not an accountant.
Rafner Manufacturing identified the following budgeted data in its two production departments.
Assembly | Finishing | |
Manufacturing overhead costs | \(1,200,000 | \)600,000 |
Direct labor hours . | 12,000 DLH | 20,000 DLH |
Machine hours | 6,000 MH | 16,000 MH |
Question: Midwest Paper produces cardboard boxes. The boxes require designing, cutting, and printing. (The boxes are shipped flat, and customers fold them as necessary.) Midwest has a reputation for providing high quality products and excellent service to customers, who are major U.S. manufacturers. Costs are assigned to products based on the number of machine hours required to produce them. Three years ago, a new marketing executive was hired. She suggested the company offer custom design and manufacturing services to small specialty manufacturers. These customers required boxes for their products and were eager to have Midwest as a supplier. Within one year, Midwest found that it was so busy with orders from small customers, it had trouble supplying boxes to all its customers on a timely basis. Large, long-time customers began to complain about slow service, and several took their business elsewhere. Within another 18 months, Midwest was in financial distress with a backlog of orders to be filled.
Required
1. What do you believe are the major costs of making boxes? How are those costs related to the volume of boxes produced?
2. How did Midwest’s new customers differ from its previous customers?
3. Would the unit cost to produce a box for new customers be different from the unit cost to produce a box for its previous customers? Explain.
4. Could Midwest’s fate have been different if it had used ABC for determining the cost of its boxes?
5. What information would have been available with ABC that might have been overlooked using a traditional volume-based costing method?
The usefulness of a single plantwide overhead rate is based on two assumptions. What are those assumptions?
Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for 2017 follow.
Molding | Trimming | |
Direct labor hours | 52,000 DLH | 48,000 DLH |
Machine hours | 30,500 MH | 3,600 MH |
Overhead costs | \(730,000 | \)590,000 |
Data for two special order parts to be manufactured by the company in 2017 follow.
Part A27C | Part X82B | |
Number of units | 9,800 units | 54,500 units |
Machine hours | ||
Molding | 5,100 MH | 1,020 MH |
Trimming | 2,600 MH | 650 MH |
Direct labor hours | ||
Molding | 5,500 DLH | 2,150 DLH |
Trimming | 700 DLH | 3,500 DLH |
Required
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