The Automachine Corporation produces three high-quality components and last year allocated all costs except material on the basis of direct labour hours/unit. However, due to the introduction of CAD/CAM and a complete review of the cost allocation system, Automachine Corporation is considering changing its basis of machined component costs. For the following year the budget and production data have been extracted by the machine manufacturing department:

Activity 1 – Automated machinery total cost $1,800,000

Activity 2 – Finishing operations total cost 530,000

Activity 3 – Material handling total costs 130,000

Activity 4 – Packaging and shipping costs 100,000

Activity 5 – Production setup total costs 80,000

Activity 6 – Production scheduling total costs 60,000

$2,700,000

The most appropriate cost drivers for the six activities have been identified as: machine hours, direct labour hours, number of parts, number of orders shipped, number of production setups, and number of production orders respectively.

Based on actual data for the previous year, next year’s predicted data for the three high-quality components are as follows:

Compu #123 Compu #456 Compu #789

Machine hours/unit 4 4 10

Direct labour hours/unit 1 3 6

Number of parts/unit 15 25 60

Number of orders shipped 500 1,000 400

Number of production setups 50 25 25

Number of production orders 150 35 100

Total units to be produced 5,000 2,500 400

Direct materials cost/unit 40 25 55

Required:

As the Management Accountant for the Automachine Corporation, prepare supporting schedules for:

1. Activity rates for each of the six activities.
2. A budget of total costs and unit costs for each of the three components, excluding direct materials.
3. The computation of the budgeted total and unit costs using the old direct labour hour based system for each of the three components.
4. Comparing the results of (b) and (c) above suggest the most appropriate system, and discuss the pros and cons of using ABC cost drivers.

Answer rating: 100% (QA)

d Comparing results from b and c above as follows Allocation Basis Compu 123 Compu 456 Compu 789 Act... View the full answer