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Mill Creek Company, located in Lakeside, Oregon, manufactures travel trailers and toy haulers....

Question:

Mill Creek Company, located in Lakeside, Oregon, manufactures travel trailers and toy haulers. Mill Creek's management team has just completed the budget for the upcoming year and has estimated the following costs:

Name of Budgeted CostBudgeted Cost
Plant insurance$86,100
Testing raw materials45,000
Manufacturing equipment setup7,200
Quality inspections57,000
Property taxes23,000
Electricity, plant14,000
Electricity, manufacturing equipment51,250
Depreciation, plant18,800
Depreciation, manufacturing equipment36,700
Maintenance worker (manufacturing equipment)22,500
Indirect labor (manufacturing equipment setup)8,300
Design engineering220,000

1. Assign each of the budgeted costs above to one of the following activity cost pools:

Engineering
Equipment setup
Quality control
Factory facilities
Manufacturing equipment

2.Compute the total cost of each pool.

3.Indicate whether the activities in each pool are unit, batch, product, or facility level.

4.Identify the most likely driver for each cost pool from the following list:

Number of inspections/tests
Square feet
Machine hours
Engineering hours
Number of setups

Activity-based costing:

Activity-based costing (ABC) assigns manufacturing overhead to the main activities of the production process. These activities are the reasons for overhead being consumed during production. At this point we then assign overhead to the individual products based on how much they consume in each activity.

ABC should only be implemented by firms where there is a difference in quality, complexity, manufacturing process between their different products they produce. If all the products we produce are basically the same and consume roughly the same amount of resources during production, than using a predetermined overhead rate is sufficient in applying overhead.

Each activity applies overhead using their own activity-based rate (AB rate) calculated as follows:

AB rate = Overhead allocated / Cost driver volume

Once we have calculated the AB rate we apply overhead from each activity to each product as follows:

Applied overhead = AB rate * Actual driver usage

Answer and Explanation: 1

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1.

Plant insurance$86,100 - Factory facilities
Testing raw materials45,000 - Quality control
Manufacturing equipment setup7,200 - Equipment setup
Qu...

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Activity-Based Costing: Definition, Formula & Examples

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Chapter 13 / Lesson 6
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Understand activity-based costing and its purpose in business. Discover the activity-based costing formula and learn how to calculate it using examples.


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