Question: After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he
After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 106,000 units of the Sport model and 43,000 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by one-third.
Cost Drivers and Cost Driver VolumesCenterPoint Manufacturing Facility
| Activity | Cost Driver | Cost Driver Volume | ||
|---|---|---|---|---|
| Sport | Pro | Total | ||
| Assembly building | ||||
| Assembling | Machine-hours | 6,600 | 30,600 | 37,200 |
| Setting up machines | Setup hours | 46 | 460 | 506 |
| Handling material | Production runs | 14 | 46 | 60 |
| Packaging building | ||||
| Inspecting and packing | Direct labor-hours | 62,400 | 24,000 | 86,400 |
| Shipping | Number of shipments | 106 | 212 | 318 |
Third Quarter Unit Cost Report, Activity-Based CostingCenterPoint Manufacturing Facility
| Sport | Pro | |
|---|---|---|
| Direct material | $ 1,506,000 | $ 2,412,000 |
| Direct labor | ||
| Assembly | $ 756,000 | $ 612,000 |
| Packaging | 996,000 | 372,000 |
| Total direct labor | $ 1,752,000 | $ 984,000 |
| Direct costs | $ 3,258,000 | $ 3,396,000 |
| Overhead | ||
| Assembly building | ||
| Assembling (@ $30 per MH) | $ 198,000 | $ 918,000 |
| Setting up machines (@ $900 per setup hour) | 41,400 | 414,000 |
| Handling material (@ $3,000 per run) | 42,000 | 138,000 |
| Packaging building | ||
| Inspecting and packing (@ $5 per direct labor-hour) | 312,000 | 120,000 |
| Shipping (@ $1,320 per shipment) | 139,920 | 279,840 |
| Total ABC overhead | $ 733,320 | $ 1,869,840 |
| Total ABC cost | $ 3,991,320 | $ 5,265,840 |
| Number of units | 106,000 | 43,000 |
| Unit cost | $ 37.65 | $ 122.46 |
Required:
Compute the amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900.
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