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Assume that one of ITW's divisions has the following predicted indirect costs and cost drivers for 2013 for the given activity cost pools:

FABRICATION FINISHING
DEPARTMENT DEPARTMENT COST DRIVER

Maintenance $20,000 $10,000 Machine hours
Materials Handling 30,000 15,000 Material Moves Machine Setups 70,000 5,000 Machine Setups
Inspections -0- 25,000 Inspection hours

The following activity predictions were also made for the year:

FABRICATION FINISHING
DEPARTMENT DEPARTMENT
Machine hours 10,000 5,000
Materials moves 3,000 1,500
Machine setups 700 50
Inspection hours -0- 1,000

It is assumed that the cost per unit of activity for a given activity does not vary between departments.

Suppose ITW's divisional manager is trying to evaluate the company's product mix strategy regarding two of its five product modes, COBRA and ASP. The company has been using a plant-wide overhead rate based on machine hours but is considering switching to either department rates or activity based rates. The production manager has provided the following data for the production of a batch of 100 units for each of these models:

COBRA ASP
Direct materials cost $12,000 $18,000
Direct labor cost 5,000 4,000
Machines hours (Fabrication) 500 700
Machine hours (Finishing) 200 100
Material moves 30 50
Machine setups 5 9
Inspection hours 30 60

REQUIRED:
A. Determine the cost of one unit of Cobra and Asp, assuming a plant-wide overhead rate is used based on total machine hours.
B. Determine the cost on one unit of Cobra and Asp, assuming department overhead rates are used. Overhead is assigned based on machine hours in both departments.
C. Determine the cost of one unit of Cobra and Asp, assuming activity based overhead rates are used for maintenance, materials handling, machine setup, and inspection activities.
D. prepare a short report for management regarding the results of these calculations.

 

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