Several years after reengineering its production process, King Corporation hired a new controller, Christine Erickson. She developed an ABC system very similar to the one used by King's chief rival. Part of the reason Erickson developed the ABC system was because King's profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before „ adopting the new ABC system, the company had used a plantwide overhead rate, based on direct labor hours developed years ago. For the upcoming year, King's budgeted ABC manufacturing overhead allocation rates are as follows: Activity Allocation Base Activity Cost allocation rate
Materials handling Number of parts $4.00 per part
Machine setup Number of setups $375.00 per setup
Insertion of parts Number of parts $28.00 per part
Finishing Finishing direct labor hours $54.00 per hour

The number of parts is now a feasible allocation base because King recently purchased bar-coding technology. King produces two wheel models: Standard and Deluxe Budgeted data for the upcoming year are as follows:

Standard Delux
Parts per wheel 8 10
Setups per 1,000 wheels 20 20
Finishing direct labor hours per wheel 2 3.5
Total direct labor hours per wheel 2.6 3.4

The company's managers expect to produce 1,000 units of each model during the year.

Required:
a. Compute the total budgeted manufacturing overhead cost for the upcoming year.
b. Compute the manufacturing overhead cost per wheel of each model using ABC.
c. Compute the company's traditional plantwide overhead rate. Use this rate to determine the manufacturing overhead cost per wheel under the traditional system.

King Corporation

a. Computation of total budgeted manufacturing overhead cost:

 Activities                                   Standard      Deluxe      Total

Materials handling (number of parts):

Standard = 8 x $4 x 1,000         $32,000

Deluxe = 10 x $4 x 1,000                               $40,000      $72,000

Machine setup (number of parts):

                = 20 x $375                $7,500        $7,500       $15,000

Insertion of parts (number of parts):

Standard = 8 x $28 x 1,000  $224,000

Deluxe = 10 x $28 x 1,000                         $280,000   $504,000

Finishing (direct labor hours):

Standard = 2 x $54 x 1,000  $108,000

Deluxe = 3.5 x $54 x 1,000                      $189,000     $297,000

Total                                      $371,500    $516,500     $888,000

b. Computation of the manufacturing overhead cost per wheel of each model using ABC:

Standards = $371,500/1,000 = $371.50

Deluxe =     $516,500/1,000 = $516.50

c. Computation of the company's traditional plantwide overhead rate to determine manufacturing overhead cost per wheel:

Overhead rate = $888,000/6,000 = $148

Manufacturing overhead cost per wheel:

Standard = $148 x 2.6 = $384.80

Deluxe = $148 x 3.4   = $503.20

Explanation:

a) Calculations:

Total overhead cost = $888,000

Allocation based on total direct labor hours per wheel

Plantwide overhead rate:

Total labor hours:

Standard  2.6 x 1,000 = 2,600 hours

Deluxe  3.4 x 1,000 = 3,400 hours

Total labor hours = 6,000 (2,600 + 3,400)

= $888,000/6,000 = $148 per direct hour

b) According to wikipedia.com, "Activity-based costing is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs into direct costs compared to conventional costing."

steering wheels are always situated on the left side of the car.

always drive on the right side of the road.

white lines separate lanes of traffic traveling the same direction.

hashed or broken lines means you may change lanes when it is safe.

solid white lines mean stay in your lane.

yellow lines separate traffic moving in opposing directions.

hashed or broken yellow lines mean you can carefully pass, paying attention to oncoming traffic.

never cross a solid yellow line (or double yellow line).

when turning left at an intersection, pass in front of any cars that are turning left from the opposing direction (do not try to pass behind them).

use the left lane to pass other cars traveling your direction.

do not pass in the right lane unless absolutely necessary.

if you are driving in the far left hand lane and someone would like to pass you, move over to the right lane when it is safe to do so and allow them to pass.

you must always yield to pedestrians.

come to a complete stop whenever you see pedestrians trying to cross the street.

never pass a school bus if it has flashing red lights. wait until the lights have stopped.

be aware of bicyclists. often they share the road with cars and are supposed to also follow general traffic laws.

be particularly careful about driving in cities with bike lanes -- always check before turning that a bike is not coming.

it is mandatory to pull over or stop at an intersection to allow an emergency vehicle to pass you if you see one traveling with lights flashing and/or a siren running.

do not overuse your car horn. horns are used almost exclusively for emergency situations or for when you feel unsafe.

explanation:

the interest will be $59.71

hope this