Question

Glassworks Inc. produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following data.
Rounded Edge Squared Edge Total
Direct materials $ 9,500 $ 21,600 $ 31,100
Direct labor 6,200 11,800 18,000
Overhead (300% of direct labor cost) 18,600 35,400 54,000
Total cost $ 34,300 $ 68,800 $ 103,100
Quantity produced 10,500 ft. 14,000 ft.
Average cost per ft. (rounded) $ 3.27 $ 4.91
Glassworks's controller wishes to apply activity-based costing (ABC) to allocate the $54,000 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly from that reported above. She has collected the following information.
Overhead Cost Category (Activity Cost Pool) Cost
Supervision $ 2,160
Depreciation of machinery 28,840
Assembly line preparation 23,000
Total overhead $ 54,000
She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines. (Round activity rate and cost per unit answers to 2 decimal places.)
Usage
Overhead Cost Category (Activity Cost Pool) Driver Rounded Edge Squared Edge Total
Supervision Direct labor cost ($) $ 6,200 $ 11,800 $ 18,000
Depreciation of machinery Machine hours 400 hours 800 hours 1,200 hours
Assembly line preparation Setups (number) 32 times 93 times 125 times
Required:
Use this information to (1) assign these three overhead cost pools to each of the two products using ABC, (2) determine average cost per foot for each of the two products using ABC, and (3) compare the average cost per foot under ABC with the average cost per foot under the current method for each product. For part 3, explain why a difference between the two cost allocation methods exists.

Answer 1

Answer:

Overhead Cost Category (Activity Cost Pool)       Cost

Supervision                                                             $2,160

Depreciation of machinery                                  $28,840

Assembly line preparation                                   $23,000

Total overhead                                                     $54,000

Supervision

Direct labor cost ($) $6,200 $11,800 $18,000

Depreciation of machinery

Machine hours 400 hours 800 hours 1,200 hours

Assembly line preparation Setups (number)

32 times 93 times 125 times

1)

overhead costs assigned to Rounded Edge

supervision = $2,160 x ($6,200 / $18,000) = $744

depreciation = $28,840 x (400 / 1,200) = $9,613

assembly line preparation = $23,000 x (32/125) = $5,888

total overhead costs = $16,245

overhead costs assigned to Squared Edge

total overhead costs = $54,000 - $16,245 = $37,755

2)

total costs assigned to Rounded Edge

materials $9,500

direct labor $6,200

overhead $16,245

total $31,945

cost per foot = $31,945 / 10,500 = $3.0424 per foot

total costs assigned to Squared Edge

materials $21,600

direct labor $11,800

overhead $37,755

total $71,155

cost per foot = $71,155 / 14,000 = $5.0825 per foot

3)   The average cost per foot of Rounded Edge decreased because lower overhead costs were allocated to their production.  

The average cost per foot of Squared Edge increased because higher overhead costs were allocated to their production.