ACCA107 – Strategic Cost Management

Activity Based Costing

C. N. Dait

Exercise 1. Multiple versus Single Overhead Rates

Deoro Company has identified the following overhead activities, costs, and activity drivers for the
coming year:

Activity Expected Cost Activity Driver Activity Capacity

Setting up equipment P480,000 Number of setups 600
Ordering Costs 360000 Number of orders 18,000
Machine Costs 840,000 Machine hours 42,000
Receiving 400,000 Receiving hours 10,000

Deoro produces two models of dishwashers with the following expected prime costs and activity
demands:

Model A Model B
Direct materials P600,000 P800,000
Direct labor P480,000 P480,000
Units completed 16,000 8,000
Direct labor hours 6,000 2,000
Number of setups 400 200
Number of orders 6,000 12,000
Machine hours 24,000 18,000
Receiving hours 3,000 7,000

The company’s normal activity is 8,000 direct labor hours.

Required:

1. Determine the unit cost for each model using direct labor hours to apply overhead.
2. Determine the unit cost for each model using the four activity drivers.
3. Which method produces the more accurate cost assignment? Why?

END