Chapter 17: Activity-Based Costing

To allocate overhead costs using Activity-Based Costing (ABC), we will follow the three-step process described in your text. Let's break down each step using the provided information about KartCo's budgeted overhead costs and activity pools. Step 1: Identify Activities and Assign Budgeted Costs to Activity Cost Pools First, we will identify the activity cost pools and assign budgeted overhead costs to each. Activity Cost Pools and Budgeted Overhead Costs • • • • Production: $600,000 Setup: $2,000,000 Design: $1,200,000 Factory Services: $1,000,000 Total Budgeted Overhead Costs: $4,800,000 Step 2: Compute Overhead Activity Rates Next, we will compute an overhead activity rate for each activity cost pool. The activity rates are calculated based on an appropriate cost driver. Assumed Activity Drivers and Budgeted Activity Levels Let's assume the following activity drivers for each cost pool: • • • • Production: Direct Labor Hours (DLH) - 100,000 DLH Setup: Number of Setups - 400 setups Design: Number of Design Changes - 100 design changes Factory Services: Square Feet of Facility - 50,000 sq. ft. Calculating Activity Rates Using the formula: Activity Rate=Budgeted Overhead CostBudgeted Activity Level 1. Production Activity Rate: Production Activity Rate=600,000100,000=6 per DLH 2. Setup Activity Rate: Setup Activity Rate=2,000,000400=5,000 per setup 3. Design Activity Rate: Design Activity Rate=1,200,000100=12,000 per design change Factory Services Activity Rate: Factory Services Activity Rate=1,000,00050,000=20 per sq. ft. Step 3: Allocate Overhead Costs to Cost Objects Now, we will allocate overhead costs to the products based on their actual usage of each activity. Assumed Actual Activity Usage for Products Let's assume the following usage for each type of go-kart: • • Standard Go-Karts: o Direct Labor Hours: 75,000 DLH o Number of Setups: 300 setups o Number of Design Changes: 0 o Square Feet: 30,000 sq. ft. Custom Go-Karts: o Direct Labor Hours: 25,000 DLH o Number of Setups: 100 setups o Number of Design Changes: 100 o Square Feet: 20,000 sq. ft. Calculate Overhead Allocated 1. Standard Go-Karts: • Production Costs: Production Cost=75,000 DLH×6=450,000 • Setup Costs: Setup Cost=300 setups×5,000=1,500,000 • Design Costs: Design Cost=0 design changes×12,000=0 Factory Services Costs: Factory Services Cost=30,000 sq. ft.×20=600,000 • Total Overhead Allocated to Standard Go-Karts: Total Cost=450,000+1,500,000+0+600,000=2,550,000 Custom Go-Karts: • Production Costs: Production Cost=25,000 DLH×6=150,000 • Setup Costs: Setup Cost=100 setups×5,000=500,000 Design Costs: Design Cost=100 design changes×12,000=1,200,000 Factory Services Costs: Factory Services Cost=20,000 sq. ft.×20=400,000 • Total Overhead Allocated to Custom Go-Karts: Total Cost=150,000+500,000+1,200,000+400,000=2,250,000 Summary of Results 1. Overhead Allocated to Standard Go-Karts: $2,550,000 2. Overhead Allocated to Custom Go-Karts: $2,250,000 Overhead Cost per Unit Assuming KartCo produces 5,000 standard go-karts and 2,000 custom go-karts: 1. Standard Go-Karts Overhead Cost per Unit: Overhead Cost per Unit=2,550,0005,000=510 per unit Custom Go-Karts Overhead Cost per Unit: Overhead Cost per Unit=2,250,0002,000=1,125 per unit Conclusion Using Activity-Based Costing (ABC) allows for a more precise allocation of overhead costs based on the actual activities that drive costs. This results in better product cost insights, which can significantly influence pricing and product mix decisions. If you have any specific questions or want to explore further aspects of ABC, let me know!