Several years after reengineering its production process, King, Corp. hired a new controller, Tammy English. She developed an ABC system very similar to the one used by King's chief rival, Risingsun. Part of the reason English 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, King had used a plantwide overhead rate based on direct labor hours that was 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. . . . . . . . . . . . ...$ 3.75 per part
Machine setup . . . . . . . . . . . . . . Number of setups. . . . . . . . . . $314.20 per setup
Insertion of parts . . . . . . . . . . . . Number of parts. . . . . . . . . . . . $ 32.00 per part
Finishing . . . . . . . . . . . . . . . . . . Finishing direct labor hours.....$ 54.00 per hour
The number of parts is now a feasible allocation base because King recently installed a plantwide computer system. King produces two wheel models: Standard and Deluxe. Budgeted data for the upcoming year are as follows:
Standard Deluxe
Parts per wheel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0. . . . . . . . . . . .7.0
Setups per 1,000 wheels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.0. . . . . . . . . 15.0
Finishing direct labor hours per wheel . . . . . . . . . . . . . . . . . . 1.1. . . . . . . . . . . 2.8
Total direct labor hours per wheel . . . . . . . . . . . . . . . . . . . . . . 2.0. . . . . . . . . . 3.1
The company's managers expect to produce 1,000 units of each model during the year.
Requirements
1. Compute the total budgeted manufacturing overhead cost for the upcoming year.
2. Compute the manufacturing overhead cost per wheel of each model using ABC.
3. Compute King's traditional plantwide overhead rate. Use this rate to determine the manufacturing overhead cost per wheel under the traditional system.