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Activity Based Costing and Special Order

#1. Widgets Incorporated produces 2 types of widgets: the Basic Widget and the Delux Widget. The company has recently adopted an activity based costing (ABC) system with the following activities and cost drivers related to overhead costs.

Activity Total Costs Cost Driver Units of Cost Driver
Material ordering $400,000 # of purchase orders 8,000
Material inspection $150,000 # of receiving reports 6,000
Equipment setup $250,000 # of setups 2,000
Quality Control $300,000 # of inspections 10,000
Total overhead $1,100,000
Below is specific cost information for the Basic Widget and the Deluxe Widget.

Cost Driver Basic Widget Deluxe Widget
Purchase orders 3,500 4,500
Receiving reports 2,800 3,200
Setups 950 1050
Inspections 4,100 5,900

Other information:

Direct Materials $400,000 $500,000
Direct Labor $240,000 $260,000
Direct Labor Hours 80,000 120,000

1. What is the cost per unit for each of the following cost drivers?

a. Purchase orders
b. Receiving reports
c. Setups
d. Inspections

2. Using activity based costing, what are the total overhead costs assigned to the Basic Widget?

3. Using activity based costing, what are the total overhead costs assigned to the Basic Widget?

4. Using a traditional costing system that assigns overhead based on direct labor hours, what are the total overhead costs assigned to the Basic Widget?

5. Using a traditional costing system that assigns overhead based on direct labor hours, what are the total overhead costs assigned to the Delux Widget

#2. The Tie Company manufactures ties. When 18,000 ties are produced, the costs per unit are:

Direct Materials $0.60
Direct Labor $3.00
Variable Overhead $1.20
Fixed Overhead $1.60
Variable Selling Expenses $0.80
Fixed Selling Expenses $1.10
Total $8.30

The ties normally sell for $13 each, however, the Tie Company has received a special order for 2,000 ties at $6.00 per tie. Assume the Tie Company has excess capacity.

1. By how much would operating income change if the Tie Company accepted the special order?

Solution Summary

The solution has 2 problems. One dealing with the use of activity based costing for cost allocation and the second one relating to special order

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