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    Activity Based Costing for Cordless Phone Manufacturing

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    The cordless phone manufacturing division of a Denver-based consumer electronics company uses activity-based costing. For simplicity, assume that its accountants have identified only the following three activities and related cost drivers for indirect production costs:

    Activity Cost Driver:
    Materials handling, Direct materials cost
    Engineering, Engineering change notices
    Power, Kilowatt hours

    Three types of cordless phones are produced: SA2, SA5, and SA9.
    Direct costs and cost driver activity for each product for a recent month are as follows:
    SA2 SA5 SA9
    Direct materials cost $25,000 $50,000 $125,000
    Direct labor cost $4,000 $1,000 $3,000
    Kilowatt hours 50,000 200,000 150,000
    Engineering change notices: 13 5 2

    Indirect production cost for the month was
    Materials handling $8,000
    Engineering $20,000
    Power $16,000
    Total indirect production cost $44,000

    a. How do I compute the indirect production cost allocated to each product with the activity based costing system?
    b. Suppose all indirect production costs had been allocated to products based on direct labor costs. How do I compute the indirect production costs allocated to each product?

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    Solution Summary

    This solution looks at ABC (activity based costing) for a cordless phone manufacturing division.