Activity-Based Costing, Cost Flow Diagram, and Predetermined Overhead Rates
Huron Furniture is considering updating its cost system to an activity-based costing system and is interested in understanding the effects. The company’s cost accountant has identified three overhead cost pools along with appropriate cost drivers for each pool.
|
Cost Pools |
Costs |
Activity |
Drivers |
|
Utilities |
450,000 |
60,000 |
Machine-hours |
|
Schedulding and setup |
450,000 |
600 |
Setup |
|
Material handing |
1,200,000 |
1,600,000 |
Pound of material |
The company manufactures three models of tables (oval, round, and square). The plans for production for the next year and the budgeted direct costs and activity by product line are as follows:
|
Products |
|||
|
Oval |
Round |
Square |
|
|
Total direct costs (material and labor) |
$80,000 |
$80,000 |
$80,000 |
|
Total machine-hours |
30,000 |
10,000 |
20,000 |
|
Total number of setup |
80 |
300 |
200 |
|
Total pounds of material |
500,000 |
300,000 |
800,000 |
|
Total direct labor-hours |
3,200 |
1,800 |
5,000 |
|
Number of units produced |
4,000 |
2,000 |
6,000 |
Required
a. The current cost accounting system charges overhead to products based on direct labor-hours. What unit product costs will be reported for the three products if the current cost system continues to be used?
b. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. Prepare a cost flow diagram of the proposed ABC system.
c. What are the cost driver rates for the three cost pools identi? ed by the cost accountant?
d. What unit product costs will be reported for the three products if the ABC system suggested by the cost accountant’s classi? cation of cost pools is used?
e. If management should decide to implement an activity-based costing system, what benefits should it expect?