WCP 17 Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs.

Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below are a sample of possible cost pools for Waterways.

Assembling	Payroll
Billing	Plant supervision
Digging trenches	Product design
Janitorial	Purchasing materials
Machine maintenance	Selling
Machine setups	Testing
Molding Packaging	Welding

Instructions

For each of these cost pools, what would be the likely activity cost driver?

Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waten,vays.

			Expected Use of	Actual
		Estimated	Cost Drivers	Use of
Activity Cost Pools	Cost Drivers	Overhead	per Activity	Drivers

WATERWAYS CORPORATION

Irrigation installation Machining (all machine use)	Labor cost Machine hours	$1,998,432	12,960	12,941
Customer orders	Number of orders	30,636	2,553	2,520
Shipping	none (direct)		N/A	traced directly
Design	Cost per design	820	8	7
Selling	Number of sales calls	350,400	21,900	22,100

How would you classify each of the following activities by levelunit level, batch level, product level, or facility level?

Testing of products	Machine maintenance
Designing new products	Advertising
Packaging	Equipment setups
Molding	Electricity required to run equipment
Assembling Depreciation	Requisitioning materials

(1) The results of ABC can provide a more accurate picture of costs. Discuss the value of Waterways using this system to determine overhead costs. (2) How might using ABC affect decision making at Waterways?