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 |
|
Scheduling and setup |
450,000 |
600 setups |
|
Material handling |
1,200,000 |
1,600,000 pounds 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 setups |
80 |
300 |
220 |
|
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 identified 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 Classification of cost pools is used?
e. If management should decide to implement an activity based costing system, what benefits should it expect?