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Waterways (This is a continuation of the Waterways case from Chapters 1-3.) WP4 Direct labor or machine hours may not be the appropriate cost driver for over- head in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct causeleffect rela- tionship in its applied overhead costs. Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below are a sample of possible cost pools for Waterways. Billing Digging trenches Janitorial Machine maintenance Machine setups Molding Packaging Plant supervision Product design Selling Testing Welding Instructions (a) For each of these cost pools, what would be the likely activity cost driver? (b) Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways. WATERWAYS CORPORATION Use of Actual Use of Estimated Cost Drivers Activity Cost Pools Cost Drivers Irrigation installation Machining (all machine use Machine hours Customer orders Shipping Design Selling Labor cost 12.960 1,670,400 33,408,000 1,998,432 12,941 33.,409,000 2.520 Number of orders none (direct) Cost per design Number of sales calls 30,636 traced directly 350.400 21,900 22,100 (c) How would you classify each of the following activities by level-unit level, batch level, product level, or facility level? Testing of products Designing new products Packaging Molding Assembling Machine maintenance Advertising Equipment setups Electricity required to run equipment Requisitioning materials (d) (1) The results of ABC can provide a more accurate picture of costs. Discuss the value of Waterways using this system to determine overhead costs. (2) How might using ABC affect decision making at Waterways

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