# calculating activity-based costing overhead rates

E18-21

Assume that manufacturing overhead for Glassman Company in the previous exercise consisted of the following activities and costs:

Setup (1,000 setup hours)                                            \$144,000

Production scheduling (400 batches)                       60,000

Production engineering (60 change orders)         120,000

Supervision (2,000 direct labor hours)                     56,000

Machine maintenance (12,000 machine hours)  84,000

Total activity costs                                                           \$464,000

The following additional data were provided for Job 845:

Direct materials costs                                                     \$7,000

Direct labor cost (5 Milling direct labor hours;

35 Finishing direct labor hours)                                  \$1000

Setup hours                                                                       5 hours

Production scheduling                                                   1 batch

Machine hours used (25 Milling machine hours;

5 Finishing machine hours                                            30 hours

Production engineering                                                                3 change orders

a.       Calculate the cost per unit of activity driver for each activity cost category.

b.      Calculate the cost of Job 845 using ABC to assign the overhead costs.

c.       Calculate the cost of Job 845 using the plantwide overhead rate based on machine hours calculated in the previous exercise.

d.      Calculate the cost of Job 845 using the machine hour departmental overhead rate for the Milling Department and a direct labor hour overhead rate for the Finishing Department.

E18-24

Traditional Product Costing versus Activity Based Costing

Assume that Panasonic Company has determined its estimated total manufacturing overhead cost for one of its plants to be \$204,000 consisting of the following activity cost pools for the month.

Activity Center                                 Activity Costs                    Cost Driver                         Activity Level

Assembly setup                                                \$45,000                 Setup hours                                       1,500

Material Handling                            15,000                                  Number of moves                              300

Assembly                                            120,000                 Assembly hours                                             12,000

Maintenance                                       24,000                                 Maintenance hours        1,200

Total                                                   \$204,000

Total direct labor hours used during the month were 8,000. Panasonic produced many different electronic products, including the following two products produced during the current month:

Model x301                        Modelz205

Units produced                                                                   1,000                                   1,000

Direct material cost                                                     \$15,000                                 \$15,000

Direct Labor Cost                                                          \$12,500                             \$12,500

Direct Labor hours                                                                500                                         500

Setup hours                                                                              50                                         100

Material moves                                                                                       25                                           50

Assembly hours                                                                                     800                                         800

Maintenance hours                                                                10                                          40

a.  Calculate the total cost per-unit cost of each model using direct labor hours to assign manufacturing overhead to products.

b.  Calculate the total per-unit cost of each model using activity-based costing to assign manufacturing overhead to products.

c.  Comment on the accuracy of the two methods for determining costs.

d.  Discuss some of the strategic implications of your answers to the previous requirements.

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