ACTIVITY BASED COSTING (ABC)

Believing that its traditional cost system may be providing misleading information, Farragut Manufacturing is considering an activity based costing (ABC) approach. It now employs a full cost system and has been applying its manufacturing overhead on the basis of machine hours. Farragut plans on using 50,000 direct labor hours and 30,000 machine hours in the coming year. The following data show the manufacturing overhead that is budgeted. Budgeted Budgeted Activity Cost Driver Activity Cost Material handling No. of parts handled 6.000.000 $ 720,000 Setup costs No. of setups 750 315,000 Machining costs Machine hours 30,000 540,000 Quality control No. of batches 500 225,000 Total manufacturing overhead cost: $1,800,000 Cost, sales, and production data for one of Farragut's products for the coming year are as follows: Prime costs: Direct material cost per unit $4.40 Direct labor cost per unit .05 DLH @ $15.00/DLH .75 Total prime cost $5.15 Sales and production data: Expected sales 20,000 units Batch size 5,000 units Setups 2 per batch Total parts per finished unit 5 parts Machine hours required 80 MH per batch