Craftmore Machining produces machine tools for the construction industry. The following details about overhead costs were taken from its company records. Production Activity

Indirect Labor

Indirect Materials

Other Overhead

Grinding

$320,000

Polishing

$135,000

Product modification

600,000

Providing power

$255,000

System calibration

500,000

Additional information on the drivers for its production activities follows.

Grinding

13,000 machine hours

Polishing

13,000 machine hours

Product modification

1,500 engineering hours

Providing power

17,000 direct labor hours

System calibration

400 batches

Required

1. Classify each activity as unit level, batch level, product level, or facility level.

2. Compute the activity overhead rates using ABC. Form cost pools as appropriate.

3. Determine overhead costs to assign to the following jobs using ABC.

Job 3175

Job 4286

Number of units

200 units

2,500 units

Machine hours

550 MH

5,500 MH

Engineering hours

26 eng hours

32 eng. hours

Batches

30 batches

90 batches

Direct labor hours

500 DLH

4,375 DLH

4. What is the overhead cost per unit for Job 3175? What is the overhead cost per unit for Job 4286?

5. If the company used a plantwide overhead rate based on direct labor hours, what is the overhead cost for each unit of Job 3175? Of Job 4286?

6. Compare the overhead costs per unit computed in requirements 4 and 5 for each job. Which method more accurately assigns overhead costs?

Craftmore Machining

1. Classification of activity as unit level, batch level, product level, or facility level:

Production Activity         Level

Indirect Labor                 Facility

Indirect Materials           Product

Grinding                          Product

 Polishing                         Product

Product modification     Product  

Providing power            Facility

 System calibration         Batch

2. The Activity Overhead Rates using ABC:

Grinding = $24.62/machine hour

Polishing = $10.38/machine hour

Product modification = $400/eng.h

Providing power = $15/DLH

System calibration = $1.25/batch

3. Assignment of overhead costs:

                                    Job 3175               Job 4286

Number of units         200 units             2,500 units

Machine hours           550 MH                5,500 MH

Engineering hours     26 eng hours       32 eng. hours

Batches                      30 batches           90 batches

Direct labor hours     500 DLH              4,375 DLH

                                                            Job 3175               Job 4286

Grinding = $24.62/machine hour      $13,541                  $135,410

Polishing = $10.38/machine hour         5,709                    57,090

Product modification = $400/eng.h   10,400                     12,800

Providing power = $15/DLH                 7,500                    65,625

System calibration = $1.25/batch              37.50                      112.50

Total costs allocated                         $37,187.50            $271,037.50

Cost per unit                                      $185.94                  $108.42

4. Overhead cost per unit:

Job 3175 , Overhead cost per unit  = $185.94 ($37,187.50/200)

Job 4286 Overhead cost per unit = $108 ($271,037.50/2,500)

5. Plantwide overhead rate

Total overhead costs = $1,810,000

Total direct labor hours = 4,875

Overhead rate = $1,810,000/4,875 = $371.28

                                   Job 3175               Job 4286

Direct labor hours     500 DLH              4,375 DLH

Total overhead cost $185,640           $1,624,350

Overhead cost per unit $928.20       $649.74

6.  Overhead cost per unit   Job 3175               Job 4286

    Using ABC                         $185.94                  $108.42

    Using Plantwide rate        $928.20                $649.74

ABC rate more accurately assigns overhead costs than using plantwide rate.

Explanation:

a) Data and Calculations:

Production Activity      

Indirect Labor    

Indirect Materials

Other Overhead           Costs         Usage                                 Usage Rate

Grinding                      $320,000     13,000 machine hours     $24.62/mh

Polishing                      $135,000     13,000 machine hours     $10.38/mh

Product modification    600,000     1,500 engineering hours $400/eng.h

Providing power        $255,000      17,000 DLH                       $15/DLH

System calibration       500,000     400 batches                      $1.25/batch

Total overhead        $1,810,000

b) Craftmore incurs unit-level costs each time a unit is produced. It incurs batch-level costs each time it produces a batch of goods. It incurs product-level costs to support the production of each type of product. Finally, Craftmore's facility-level costs sustain the facility's general manufacturing process.