Select Page

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

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

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

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.