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 Cost | Budgeted Cost |
| Plant insurance | $86,100 |
| Testing raw materials | 45,000 |
| Manufacturing equipment setup | 7,200 |
| Quality inspections | 57,000 |
| Property taxes | 23,000 |
| Electricity, plant | 14,000 |
| Electricity, manufacturing equipment | 51,250 |
| Depreciation, plant | 18,800 |
| Depreciation, manufacturing equipment | 36,700 |
| Maintenance worker (manufacturing equipment) | 22,500 |
| Indirect labor (manufacturing equipment setup) | 8,300 |
| Design engineering | 220,000 |
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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View this answer1.
| Plant insurance | $86,100 - Factory facilities |
| Testing raw materials | 45,000 - Quality control |
| Manufacturing equipment setup | 7,200 - Equipment setup |
| Qu... |
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Chapter 13 / Lesson 6Understand activity-based costing and its purpose in business. Discover the activity-based costing formula and learn how to calculate it using examples.