Question

Disc uses activity-based costing. Two of Disc's production activities are kitting(assembling the raw materials needed for each computer in one kit) and boxingthe completed products for shipment to customers. Assume that Disc spends $10,000,000 per month on kitting and $13,000,000 per month on boxing. If a desktop now uses 130 parts, what is the new kitting cost assigned to one desktop?

Answer 1

Given Information:

Disc allocates the​ following:

Kitting costs based on the number of parts used in the computer

Boxing costs based on the cubic feet of space the computer requires

Suppose Disc estimates it will use 300,000,000 parts per month and ship products with a total volume of 35,000,000 cubic feet per month. Assume that each desktop computer requires 175 parts and has a volume of 5 cubic feet. The predetermined overhead allocation rate for kitting is $0.03 per part and the predetermined overhead allocation rate for boxing is ​$0.60 per cubic foot.

Solution:

Compute the activity rate as shown below:

Activity       Driver             Total cost         Cost drivers(a)       Activity rate(a/b)

Kitting       No. of parts     $10,000,000      300,000,000           0.03

Boxing      Cubic feet       $13,000,000       35,000,000             0.37

Compute the kitting and boxing costs assigned to one desktop computer as shown below :

Kitting cost assigned to one desktop = $0.03 * 175

                                                             = $ 5.25 per desktop computer

Boxing cost assigned to one desktop = $0.37 * 5

                                                               = $ 1.85 per desktop