Question: First-stage allocation, activity-based costing, manufacturing sector.Thurgood Devices uses activity-based costing to allocate overhead costs to customer orders for pricing purposes. Many customer orders are won
First-stage allocation, activity-based costing, manufacturing sector.Thurgood Devices uses activity-based costing to allocate overhead costs to customer orders for pricing purposes. Many customer orders are won through competitive bidding. Direct material and direct manufacturing labor costs are traced directly to each order. Thurgoods direct manufacturing labor rate is $20 per hour. The company reports the following yearly overhead costs:
| Wages and salaries | $480,000 |
| Depreciation | 60,000 |
| Rent | 120,000 |
| Other overhead | 240,000 |
| Total overhead costs | $900,000 |
Thurgood has established four activity cost pools:
Activity Cost Pool
Activity Measure
Total Activity for the Year
Direct manufacturing labor support
Number of direct manufacturing labor-hours
30,000 direct manufacturing labor-hours
Order processing
Number of customer orders
500 orders
Design support
Number of custom designs
100 custom designs
Other
Facility-sustaining costs allocated to orders based on direct manufacturing labor-hours
30,000 direct manufacturing labor-hours
Only about 20% of Thurgoods yearly orders require custom designs.
Paul Moeller, Thurgoods controller, has prepared the following estimates for distribution of the overhead costs across the four activity cost pools:
Direct Manufacturing Labor Support
Order Processing
Design Support
Other
Total
Wages and salaries
40%
25%
30%
5%
100%
Depreciation
25%
10%
15%
50%
100%
Rent
30%
25%
10%
35%
100%
Other overhead
20%
30%
35%
15%
100%
Order 448200 required $4,550 of direct materials, 80 direct manufacturing labor-hours, and one custom design.
Required
- 1.Allocate the overhead costs to each activity cost pool. Calculate the activity rate for each pool.
- 2.Determine the cost of Order 448200.
- 3.How does activity-based costing enhance Thurgoods ability to price its orders? Suppose Thurgood used a traditional costing system to allocate all overhead costs to orders on the basis of direct manufacturing labor-hours. How might this have affected Thurgoods pricing decisions?
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