Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs.
Big looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below are a sample of possible cost pools for Big.
Assembling
Payroll
Billing
Plant supervision
Product design
Janitorial
Purchasing materials
Machine maintenance
Selling
Machine setups
Molding
Welding
Packaging
Instructions for part 4
(a) For each of these cost pools, what would be the likely activity cost driver?
(b) Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools In a possible ABC system for Big.