Question

Driven Products (DP) designs and produces automotive parts. In 2013, actual manufacturing overhead is $ 617,200. DP’s simple costing system allocates manufacturing overhead to its three customers based on machine- hours and prices its contracts based on full costs. One of its customers has regularly complained of being charged noncompetitive prices, so DP’s controller Mike Jones realizes that it is time to examine the consumption of overhead resources more closely by adopting an activity- based costing (ABC) system. He knows that there are three main activities that consume overhead resources: design, production, and engineering. Interviews with operating personnel and examination of time records yield the following detailed information:


1. Compute the manufacturing overhead allocated to each customer in 2013 using the simple costing system that uses machine- hours as the allocation base.
2. Compute the manufacturing overhead allocated to each customer in 2013 using activity- based manufacturing overhead rates.
3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining about being overcharged in the simple system? If the new activity- based rates are used to price contracts, which customer(s) will be unhappy? How would you respond to these concerns?
4. How else might DP use the information available from its activity- based costing analysis of manufacturing overhead costs?
5. DP’s managers are wondering if they should further refine the ABC system by identifying more activities. Under what conditions would it not be worthwhile to further refine the ABCsystem?


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  • CreatedJanuary 15, 2015
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