Direct labor or machine hours may not be the appropriate costdriver for overheadin all...Direct...

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Accounting

Direct labor or machine hours may not be the appropriate costdriver for overhead
in all areas of manufacturing due to the complexities of manymanufacturing
processes. Many companies use activity-based costing (ABC) whichuses multiple drivers
(items that consume resources) rather than just one driver toapply overhead to their
activities. With ABC, a company can use a cost driver that has adirect cause/effect relationship
in its applied overhead costs.
Evian looked into ABC as a method of costing because of thevariety of items it
produces and the many different activities in which it isinvolved. The activities listed
below are a sample of possible cost pools for Evian.
Assembling
Payroll
Billing
Plant supervision
Digging trenches
Purchasing materials
Machine maintenance
Selling
Machine setups
Testing
Molding
Welding
Packaging
Instructions for part 4
(a) For each of these cost pools, what would be thelikely activity cost driver?
(b) Using the following information, determine theoverhead rates and the actual cost assigned for each of theactivity cost pools in a possible ABC system forEvian.
EVIAN CORPORATION
Expected
Use of                            Actual
Estimated          CostDrivers                            Use of
Activity CostPools                      Cost Drivers      Overhead          per Activity                            Drivers
Irrigationinstallation                   Labor cost         $1,999,500             12,900                                   12,941
Machining (all machine use)      Machine hours 1,670,400        33,408,000                            33,409,000
Customer orders                          # of orders              30,636                  2,553                                     2,520
Shipping                                        none(direct)                   N/A traced directly
Design                                            Cost per design           820                     10                                          7
Selling                                            Number of calls       372,300            21,900                                   22,100
(d) (1) The results of ABC can provide a more accuratepicture of costs. Discuss the value of Evian using this system todetermine overhead costs.
(2) How might using ABC affect decision making atEvian?

Answer & Explanation Solved by verified expert

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a For each of these cost pools What would be the likely cost driver Cost pool cost driver Assembly Product assembled Payroll Number of employee on Payroll Billing Number of bills sent out Plant supervison supervisor hourss Digging trenches Number of trenches dug Purchasing Materials Number of purchases done Machine Maintenance Machine hours Selling Number of items sold Machine setup Number of setups Testing Number of test done Molding See Answer

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In: AccountingDirect labor or machine hours may not be the appropriate costdriver for overheadin all...Direct labor or machine hours may not be the appropriate costdriver for overheadin all areas of manufacturing due to the complexities of manymanufacturingprocesses. Many companies use activity-based costing (ABC) whichuses multiple drivers(items that consume resources) rather than just one driver toapply overhead to theiractivities. With ABC, a company can use a cost driver that has adirect cause/effect relationshipin its applied overhead costs.Evian looked into ABC as a method of costing because of thevariety of items itproduces and the many different activities in which it isinvolved. The activities listedbelow are a sample of possible cost pools for Evian.AssemblingPayrollBillingPlant supervisionDigging trenchesPurchasing materialsMachine maintenanceSellingMachine setupsTestingMoldingWeldingPackagingInstructions for part 4(a) For each of these cost pools, what would be thelikely activity cost driver?(b) Using the following information, determine theoverhead rates and the actual cost assigned for each of theactivity cost pools in a possible ABC system forEvian.EVIAN CORPORATIONExpectedUse of ActualEstimated CostDrivers Use ofActivity CostPools Cost Drivers Overhead per Activity DriversIrrigationinstallation Labor cost $1,999,500 12,900 12,941Machining (all machine use) Machine hours 1,670,400 33,408,000 33,409,000Customer orders # of orders 30,636 2,553 2,520Shipping none(direct) N/A traced directlyDesign Cost per design 820 10 7Selling Number of calls 372,300 21,900 22,100(d) (1) The results of ABC can provide a more accuratepicture of costs. Discuss the value of Evian using this system todetermine overhead costs.(2) How might using ABC affect decision making atEvian?