5-26

1. Cost of an interior door and an exterior door with simple costing.

Total overhead cost

Production scheduling 95,000

Material handling 45,000
Machine setup 25,000
Assembly 60,000
Inspection 8,000
Marketing cost 22,800* * (3,200 x 125) + (1,800 x 200) x 3%
Total OH cost 255,800

Simple costing

Overhead rate

Driver: total machine hours

Interior machine hours + exterior machine hours
5,500 +4,500
255,800
= 25.58
10,000

Overhead cost per unit

Machine hours per unit

5,500
Interior: = 1.71875
3,200
4,500
Exterior: 1,800 = 2.50

Overhead cost
Interior
1.71875 x 25.58 = 43.97
Exterior
2.50 x 25.58 = 63.95

Cost per unit

Interior
Direct material cost per unit 30.00
Direct manufacturing labor cost per unit 24.00
Direct cost per unit 54.00
Overhead cost per unit 43.97
Cost per unit 97.97
Exterior
Direct material cost per unit 45.00
Direct manufacturing labor cost per unit 36.00
Direct cost per unit 81.00
Overhead cost per unit 63.95
Cost per unit 144.95

2. Calculate the cost of an interior with activity-based costing

Activity-based costing

Overhead rates

Project Scheduling
40 + 85 = 125
95,000
= 760
125

Material Handling
72 + 168 = 240
45,000
= 187.50
240

Machine Setup
45 + 155=200
25,000
= 125
200

Assembly
Total machine hours = Interior machine hours + Exterior machine hour
60,000
= 6.00
10,000

Inspection
250 + 150 = 400
8,000
= 20
400

Overhead cost per unit

Interior

Project scheduling 40 x 760 = 30,400

Material handling 72 x 187.50 = 13,500
Machine setup 4 x 125 = 5,625
Assembly 5,500 x 6 = 33,000
Inspection 250 x 20 = 5,000
Marketing Cost 12,000
Total Indirect Cost 99,525
Indirect Cost per unit
99,525
= 31,100
3,200

Overhead cost per unit

Exterior

Production scheduling 85 x 760 = 64,600

Material handling 168 x 187.50 = 31,500
Machine setup 155 x 125 = 19,375
Assembly 4,500 x 6 = 27,000
Inspection 150 x 20 = 3,000
Marketing Cost 10,800
Total Indirect Cost 156,275

Indirect Cost per unit

156,275
= 86.82
1,800

Cost Per unit

Interior
Direct material cost per unit 30.00
Direct labor cost per unit 24.00
Direct cost per unit 54.00
Overhead cost per unit 31.10
Cost per unit 85.10

Exterior
Direct material cost per unit 45.00
Direct labor cost per unit 36.00
Direct cost per unit 81.00
Overhead cost per unit 86.82
Cost per unit 167.82

3. Comparison the costs of doors

Simple System
Interior 97.97
Exterior 144.95

Activity based system

Interior 85.10
Exterior 167.82

The two methods shows different result, as for the cost of Interior on the simple system is
higher than the activity based system but for the exterior it’s the other way around. It is so
because those methods have different ways of allocating indirect cost which result in the
different amount of cost.
 4. With the activity-based costing, the company would be able to understand each
activity of the business process and able to manage it better and with that the
management able to improve on where the business is lacking. Therefore it would
help the business to increase the market share.

5-29

1. Total overhead allocated with simple costing system

Overhead rate
196,200
= 19.62
10,000

Overhead cost

Job 220: 19.62 x 30 = 588.60

Job 330. 19.62 x 70 = 1,373.40
Total 1,962

2. Total overhead allocated with activity based costing system

Purchasing
28,500
= 19.00
1,500

Material Handling
47,700
= 9.00
5,300

Machine maintenance
100,000
= 110.00
10,000

Product inspection
6,800
= 4.00
1,700

Packaging
13,200
3,300
= 4.00

Job 220

Purchasing 19.00 x 21= 399.00

Material Handling 9.00 x 18 = 162.00
Machine maintenance 10.00 x 30 = 300.00
Product inspection 4.00 x 10 = 40.00
Packaging 4.00 x 17 = 68.00

Total Allocated cost 969.00

 Job 330

Purchasing 19.00 x 9= 171.00

Material Handling 9.00 x 6 = 54.00
Machine maintenance 10.00 x 70 = 700.00
Product inspection 4.00 x 2 = 8.00
Packaging 4.00 x 5 = 20.00

Total Allocated cost 953.00

3. The ABC job-costing will provide the company with more exact cost o=for each
process. That would also reveal the bidding true price, which obviously help the
company in the bidding process.