A. The allocation system might not be accurate, because it allocates based on the number of units produced. However, it does not take into account the time it takes to produce an individual unit. The overhead costs would be more accurate if they reflected not just the number of units, but the time taken to produce each unit. If the Ogunquit takes up more than 12% of the total production time for the company, then the current system undervalues it from an overhead allocation perspective. Last year, the allocation was
Units
% total Units
Overhead Allocation
Goose Rocks
50
29.41%
1350000
Kennebunkport
100
58.82%
2700000
Ogunquit
20
11.76%
540000
B. By direct labor hours, the overhead allocation would look much different:
Direct Labor
%DL
Overhead Allocation
Goose Rocks
1000
14.81%
680,000
Kennebunkport
1000
14.81%
680,000
Ogunquit
4750
70.37%
3,230,000
total
6750
C. The use of more than one cost pool would improve the overhead allocation because it would better reflect the way that resources are used in the production of each boat. Using one cost pool places the entire emphasis on just that one cost, whether it is direct labor or whether it is number of boats produced. Using multiple cost pools can help better reflect the totality of resources that the company uses for each boat.
D.
Manufacturing Overhead
Amount
GR %
GR value
KBP %
KBP Value
OQ %
OQ Value
Depreciation
2200000
25.0%
550000
37.5%
825000
37.5%
825000
Maintenance
700000
20.4%
142857
40.8%
285714
38.8%
271429
Purchasing
180000
16.7%
30000
16.7%
30000
66.7%
120000
Inspection
350000
12.5%
43750
25.0%
87500
62.5%
218750
Indirect Materials
290000
29.4%
85294
58.8%
170588
11.8%
34118
Supervision
800000
33.3%
266223
66.6%
532446
0.2%
1331
Supplies
70000
29.4%
20588
58.8%
41176
11.8%
8235
Total
1138712
1972425
1478863
E.
Ogunquit
Direct Materials
250000
Direct Labor
440000
Overhead
73943
Total...
…the sense that the overheads change depending on the level of activity. But you could work with the current traditional allocation at which point 5 units is the breakeven point:Price
800000
Direct Costs
690000
Contribution
110000
Overheads Allocated
540000
Breakeven
4.9
L. There are a few lessons. One is that activity-based costing is a more accurate way to allocate costs. Further, that having more accurate costing information can aid with pricing and production decisions. Companies will often find that they arent making as much money on some products as they think they are, because those products require far more resources to produce. Understanding the true cost structure of producing each product…
References
What is cost behavior: http://www.accountingcoach.com/blog/what-is-cost-behavior
Activity based costing: http://www.accountingcoach.com/activity-based-costing/explanation/1
Activity-Based Costing and AIS Activity-Based Costing (ABC) is an accounting method that identifies the activities a company carries out and then assigns indirect costs (overhead) to products. Activity-based costing shows the relationships between the activities, the costs, and the products, and correctly associates the lion's share of the resources used with the actual production or provision of services. The recognition of these relationships enables the indirect costs to be assigned to products in
(Questions that will assist in quantifying the relationship between resources and activities include: How much time is spent performing each activity? What equipment is used to perform activities? Do some activities have dedicated equipment? Do some activities require more space than others?) After the data on resources have been collected, establish cause-and-effect relationships between resources and activities or resources and cost objects. The third step in the process is
ABC can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver (Activity-based costing, n.d.). Bibliography Activity-based costing (ABC). (n.d.). Retrieved Apr 2, 2009, from Managers-Net: http://www.managers-net.com/activityBC.html Activity-based costing (ABC): What is it and how can reengineering teams use it?
Activity-Based Costing in Service Industries Describe the company you researched in one to two (1-2) paragraphs. Since many traditional industries that deal with goods for sale also offer some service, it was somewhat difficult to settle on a company that dealt in services exclusively. Home Depot or another of that sort would have been easy because they offer both, but the company used for this examination was State Farm. Insurance companies will
But the customized product probably takes much more design and engineering time than the mass-produced product. Traditional costing systems would not, in most cases, pick up this difference. With traditional costing a company that makes both low and high volume products might spread all of its overhead to products it manufactures based solely on machine hours. This might misallocate overheads between products. And if one product demands a significant amount
Activity-Based Costing and Traditional Systems Activity-based costing (ABC) measures the cost of a product/service based on the activities performed to produce the product/service. Activities are processes, functions, or tasks that occur over time and have recognized results. Activities use up assigned resources to produce products and services. An ABC system first allocates indirect and support expenses to activities and processes and then to products, services and customers. Therefore, the ABC system
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now