After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze the overhead costs at Business Solutions. In a recent month, Rey found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.
|
Activity |
Cost |
Driver |
|
Setting up machines |
2,000 |
25 batches |
|
Inspecting components |
7,500 |
5,000 parts |
|
Providing utilities |
10,000 |
5,000 machine hours |
Overhead has been applied to output at a rate of 50% of direct labor costs. The following data pertain to Job 6.15.
Direct materials 2,500 Number of parts
Direct labor 3,500 Machine hours
Batches 2 batches
Required:
1. What is the total cost of Job 6.15 if Business Solutions applies overhead at 50% of direct labor cost? 2. What is the total cost of Job 6.15 if Business Solutions uses activity-based costing?
3. Which approach to assigning overhead gives a better representation of the costs incurred to produce Job 6.15? Explain.