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