Scofield Industries manufactures a variety of custom products. The company has traditionally used a plantwide manufacturing overhead rate based on machine hours to allocate manufacturing overhead to its products. The company estimates that it will incur $2,530,000 in total manufacturing overhead costs in the upcoming year and will use 10,000 machine hours. Up to this point, hazardous waste disposal fees have been absorbed into the plantwide manufacturing overhead rate and allocated to all products as part of the manufacturing overhead process. Recently, the company has been experiencing significantly increased waste disposal fees for hazardous waste generated by certain products, and as a result, profit margins on all products have been negatively impacted. Company management wants to implement an activity-based costing system so that managers know the cost of each product, including its hazardous waste disposal costs.
Expected usage and costs for manufacturing overhead activities for the upcoming year are as follows:
Description of Cost Pool Estimated Cost Cost Driver Estimated Activity for this Year
Machine maintenance costs $700,000 # of machines 10,000
engineering change orders $300,000 # of change orders 6,000
hazardous waste disposal $1,530,000 pounds of hazardous materials generated 4,500
total overhead cost $2,530,000
During the year, Job 354 is started and completed. Usage for this job follows:
270 pounds of direct materials at $50 per pound
40 direct labor hours used at $15 per labor hour
140 machine hours used
7 change orders
80 pounds of hazardous waste generated
Read the requirements
1. Calculate the cost of
Job 354Job 354
using the traditional plantwide manufacturing overhead rate based on machine hours.
2. Calculate the cost of
Job 354Job 354
using activity-based costing.
3. If you were a manager, which cost estimate would provide you more usefulinformation? How might you use this information?
Requirement 1. Calculate the cost of Job 356 using the traditional plantwide manufacturing overhead rate based on machine hours. Begin by calculating the plantwide overhead rate. First identify the formula used to compute the plantwide overheadrate, then compute the rate. (Abbreviations used: MOH = manufacturing overhead; mfg. = manufacturing)
/ =
Plantwide mfg. overhead rate
/ =
Calculate the cost of Job 356.
Job Cost Record Manufacturing
JOB 356 Costs
Total job cost
Requirement 2. Calculate the cost of Job 356 using activity-based costing.
Begin by calculating the allocation rate for each activity. First determine the formula to compute the allocation rate in anactivity-based costing system, then compute the rate for each activity. (Abbreviations used: est. = estimated, MH=machinehours, Mach.=Machine, Eng.=Engineering)
Activity cost
/
= allocation rate
Mach. maintenance
/
=
per MH
Eng. change orders
/
= per order
Waste disposal / = per pound
Calculate the cost of Job 356 using activity-based costing.
Job Cost Record
Manufacturing
JOB 356
Costs
Total job cost
Requirement 3. If you were a manager, which cost estimate would provide you more useful information? How might you use this information?
The cost estimate based on the activity-based costing rates traditional plantwide manufacturing overhead rate would provide more useful information because this cost estimate takes into account the machine hours used by each product the specific resources used by each product This information can be used to