Problem - Cost Allocation and Activity Based Costing
Motor Ltd. is a company specialised in manufacturing and selling car battery chargers. The
manufacturing process involves two main departments: Department A deals with battery
assembly and Department B deals with pack mounting. Motor Ltd. (1) currently uses a plantwide overhead rate based on direct labour hours for allocating overhead costs. For the
current quarter, the budget includes $130,000 for overhead costs, $24,000 for direct labour
costs in Department A (battery assembly) paid at $16 per hour, and $60,000 for direct labour
costs in Department B (pack mounting) paid at $12 per hour.
Motor Ltd. is working on two jobs which require the following inputs:
Job X
Direct materials
$ 16,000
Direct Labour – Battery assembly (Dep.A)
$ 4,400
Direct Labour – Pack mounting (Dep.B)
$ 6,600
Job Y
$ 12,000
$ 2,400
$ 3,600
The number of units produced for Job X is 1,000, while for Job Y is 900.
Motor Ltd. has hired Ariana, a new management accountant, who suggests replacing the
current allocation system based on a plant-wide rate with (2) departmental overhead rates
where assembly overhead of $64,000 is allocated based on machine hours (16,000 hours)
and pack mounting overhead of $66,000 is allocated based on pack mounting direct labour
hours.
Based on her experience in the industry, Ariana suggests also to implement an (3) activity
based costing system, taking into account that the company is growing and the complexity
of the business is increasing. Ariana has identified the following activities, their estimated cost
for the quarter, their cost drivers and cost driver quantities for the quarter included in the
$130,000 overheads:
Activity
Set up production lines
Battery assembly
Pack mounting
Final quality test
Activity Cost
$ 33,000
$ 40,000
$ 32,000
$ 25,000
$ 130,000
Cost Driver
Setup hours
Machine hours
DL hours
# inspections
Cost Driver Qty
3,300
25,000
6,400
5,000
Required:
a) Calculate the plant-wide overhead rate for the current quarter, and determine
the total cost and cost per unit for each job
b) Recalculate the total and per unit cost for each job using departmental overhead
rates (Assume Job X uses 2,400 machine hours to make 1000 units and Job Y
uses 400 machine hours to make 900 units)
c) Recalculate the total and per unit cost for each job using activity based
overhead rates (Assume Job X requires 45 setup hours and 50% of units are
inspected; assume Job Y requires 50 setup hours and 40% of units are
inspected)