Overhead cost pools activity cost drivers drivers

Reference no: EM13692708

ACTIVITY-BASED COSTING (20 marks)

Markham Inc. designs and builds custom windows for luxury homes. Most of the windows are custom made but occasionally the company does mass production on order. Its budgeted manufacturing overhead costs for the year 2006 are as follows:

Overhead Cost Pools Amount
Purchasing $ 180,000
Production (cutting, milling, finishing) 400,000
Setting up machines 135,000
Inspecting 160,000
Utilities 300,000
Total budget overhead costs $1,175,000

For the last three years, the company has been charging overhead to products on the basis of machine hours. For the year 2006, 100,000 machine hours are budgeted.

Tommy Barry, owner-manager of Markham Inc. recently directed her accountant to implement the activity-based costing system she has repeatedly proposed. At Tommy's request, the accountant and production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Total
Overhead Cost Pools Activity Cost Drivers Drivers
Purchasing Number of orders 500
Production (cutting, milling, finishing) Direct labour hours 80,000
Setting up machines Number of setups 1,000
Inspecting Number of inspections 5,000
Utilities Square metres occupied 75,000

During this month, the company received an order for 50 window sets from a housing development contractor. The accountant prepares cost estimates for producing components for 50 window sets so Tommy can submit a contract price per window set to the contractor. The following data for the production of 50 window sets is accumulated:

Direct materials $120,000
Direct labour $135,000
Machine hours 12,000
Direct labour hours 10,000
Number of purchase orders 50
Number of machine setups 80
Number of inspections 380
Number of square metres occupied 7,000

Instructions:
(a) Calculate the predetermined overhead rate using traditional costing with machine hours as the basis. (2 marks)
(b) Calculate the manufacturing cost per window set under traditional costing. (6 marks)
(c) Calculate the manufacturing cost per window set under the proposed activity-based costing. (12 marks)

Reference no: EM13692708

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