PRACTICE PROBLEM (problem 6-15) Activity-Based Costing
Riverdale Printing Company is the publisher for many of the local newspapers and magazines. They publish nine periodicals and several other types of literature, including handouts and pamphlets. They have recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to one of their products, The Riverdale Weekly, and the ABC cost pools:
The Riverdale Weekly annual production 20,000 units
Direct material per unit $31 Direct labor per unit $6
Manufacturing overhead cost pools: Cost Pool Cost Cost Driver
Materials ordering $800,000 Number of purchase orders
Materials inspection 400,000 Number of receiving reports
Equipment setup 2,000,000 Number of setups
Quality control 900,000 Number of inspections
Other 15,000,000 Direct labor cost
Total mfg. overhead $19,100,000
Cost Pool All Products The Riverdale Weekly
Materials ordering 100,000 orders 1,000
Materials inspection 2,000 receiving reports 300
Equipment setup 100 setups 1
Quality control 4,000 inspections 400
Other $10,000,000 direct labor $120,000
a. Calculate the overhead rate per unit of activity for each of the five cost pools.
Cost Pool Cost Total cost
driver activity Cost pool rate
Materials ordering
Materials inspection
Equipment setup
Quality control
Other
Total mfg. overhead
b. Calculate the total overhead assigned to the production of The Riverdale Weekly.
Costs Activity Usage Cost Pool Rate Total Cost Allocated
Materials ordering
Materials inspection
Equipment setup
Quality control
Other
Total mfg. overhead
c. Calculate the overhead cost per unit for The Riverdale Weekly.
d. Calculate the total unit cost for The Riverdale Weekly.
Suppose that Riverdale Printing allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to The Riverdale Weekly.
e. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach.