Answer:
Explanation:
(1) Overhead Absorption Rate (OAR) = Overhead cost/No of Activities
Materials Handling Cost :
Cost driver ⇒ Kilos ( 13,000 kilos)
OAR = $130,000/13,000 = $10
Packaging Costs
Cost driver ⇒Machine hours ( 2,300 hours)
OAR = $460,000/ 2300= $200
Quality Assurance Cost
Cost driver ⇒ Samples
OAR = $118,000/ 2,000 =$59
(2) Total Overhead Cost Allocated to each unit
Commercial containers
Materials Handling Cost = $10 X 8,096 = $80,960
Packaging Costs = $200 X 1,800 = $360,000
Quality Assurance Cost = $59 X 260 = $15,340
Total Costs = $80,960 + $360,000 + $15,340 = $456,300
Total commercial containers produced = 2,700
Overhead cost per unit of Container produced = $456,300/ 2,700 = $169 per unit
Travel-pack line
Materials Handling Cost = $10 x 5,976 = $59,760
Packaging Costs = $200 x 600 = $120,000
Quality Assurance Cost = $59 x 360 =$21,240
Total Costs = $59,760 + $120,000 + $21,240 = $201,000
Total Travel packs produced = 30,000
Overhead cost per unit of travel pack = $201,000/ 30,000 = $6.7
(3) Using Original System ( Cost per machine hours)
Commercial containers
Total Overhead cost (using Machine hours) = $300 x 1,800 = $540,000
Total Overhead cost per unit = $540,000/2,700 = $200
Travel-pack line
Total Overhead cost (using machine hours) = $300 x 600 = $180,000
Total Overhead cost per unit = $180,000/30,000 = $ 6
(4)
Activity Based costing : this approach make use of activities that drive cost as a basis to determine the overhead cost per unit. This is more relevant in the current day manufacturing system where there are major activities that drive cost other than just machine hours. Using ABC allowed for fair sharing of overhead costs among different products lines which also help in determining the right pricing and identify which product consumed more activities that drive cost.
Whereas, traditional system relied on the assumption that overhead costs are majorly driven by machine hours which obviously may not be true in the current day production system. Using this approach may lead to a wrong pricing of products and also lead to wrong decision being made on a products most especially where the company has more than one product lines.
In the case of Gibson, commercial containers overhead unit cost was over estimated while Travel-pack line overhead unit cost was under-estimated using original costing system.
The error under original system was latter corrected using ABC
