1. Allocation Example Direct Materials Direct Materials Direct Labor Direct Labor Shipping Costs Shipping Costs Products Labor Related Pool Machine Related Pool Setup Pool Production Order Pool General Factory Pool First-Stage Allocations Second-Stage Allocations $/DLH $/MH $/Setup $/Order Overhead Costs $/MH Unit-Level Activity Batch-Level Activity Facility-Level Activity Next Page Click Here

2. ABC Illustration - Background Information Both products require two direct labor-hours to complete. The company plans to work 500,000 hours to meet the budgeted production. All production is sold to auto manufacturers for installation in new cars and trucks. Direct materials cost $90 per unit for the CD unit and $50 for the Tape unit. Direct labor costs at $10 per hour are $20 for both the CD and Tape unit. Both products require two direct labor-hours to complete. The company plans to work 500,000 hours to meet the budgeted production. All production is sold to auto manufacturers for installation in new cars and trucks. Direct materials cost $90 per unit for the CD unit and $50 for the Tape unit. Direct labor costs at $10 per hour are $20 for both the CD and Tape unit. Comtek Sound, Inc. makes two products, a radio with a built-in compact disc player and one with a built-in tape player. Comtek has budgeted sales of 50,000 CD units and 200,000 tape units. Next Page Click Here

3. Unit Product Costs (Using a Plantwide Overhead Rate) Total overhead costs for the current year are estimated to be $10,000,000. The company develops the following predetermined overhead rate based upon direct labor-hours: Total overhead costs for the current year are estimated to be $10,000,000. The company develops the following predetermined overhead rate based upon direct labor-hours: Predetermined overhead rate $10,000,000 500,000 DLH = $20 per DLH= Next Page Click Here

4. Gathering the Information Required to Develop ABC Units Costs The ABC project team at Comtek has developed the following basic information: Next Page Click Here

5. Computing Activity Rates Using the basic information, the activity rates can be calculated: Next Page Click Here

6. ABC Overhead Rates ÷÷ ABC overhead rates per unit Using the new activity rates, overhead can be assigned (or allocated) to the two products based upon activity: Next Page Click Here

7. Comparison of Product Costs Notice that the unit product cost of a tape unit decreased from $110 to $96.70.......... while the unit cost of a CD unit increased from $150 to $203.20. Next Page Click Here

8. Shifting of Overhead Cost When a company implements activity-based costing, overhead cost often shift from high-volume to low-volume products with a higher unit product cost resulting for the low-volume products. When a company implements activity-based costing, overhead cost often shift from high-volume to low-volume products with a higher unit product cost resulting for the low-volume products. Low-volume product Next Page Click Here