Activity-Based Costing Versus Traditional Overhead Allocation Methods. This illustrates the differences between activity-based costing and traditional methods.
Galvaset Industries manufactures and sells custom-made windows. Its job casting system was designed using an activity-based casting approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $20 per hour and that there were no beginning inventories. The following information was available for 2010, based on an expected production level of 50,000 units for the year, which will require 200,000 direct labor hours:
Activity Budgeted Cost Driver Used Cost
(Cost Driver) Cost for 2010 as Allocation Bas Allocation Rate
Materials handling $ 325,000 Number of parts used $ 0.25 per part
Cutting and lathe work 2,340,000 Number of parts used 1.80 per part
Assembly and inspection 5,000,000 Direct labor hours 25.00 per hour
The following production, costs, and activities occurred during the month of March:
Units Direct Number Direct
Produced Materials Costs of Parts Used Labor Hours
3,800 $142,000 83,600 17,180
Required:
- Calculate the total manufacturing costs and the cost per unit of the windows produced during the month of March (using the activity-based costing approach).
- Assume instead that Galvaset Industries applied manufacturing overhead on a direct labor basis (rather than using the activity-based costing system previously described). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of March. (Hint: You will need to calculate the predetermined overhead application rate using the total budgeted overhead coasts for 2010.)
- Compare the per unit costs figures calculated in parts a and b. Which approach do you think provides better information for manufacturing managers? Explain your answer.