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    Activity based costing system

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    Problem 4

    You are trying to determine whether machine hours or direct labor dollars would be the best cost driver for overhead costs. You run two regression analyses and obtain the following results:

    Machine hours:
    Multiple R .39429
    R square .15547
    Adjusted R square .14964
    Standard error .44416

    Direct labor dollars:
    Multiple R .89429
    R square .79547
    Adjusted R square .28964
    Standard error .44416

    Which variable would be the best selection for a cost driver and why?

    Problem 5
    When comparing traditional product costing and activity-based costing (ABC), which kind(s) of costs are allocated to products in a similar manner and which kind(s) are allocated to products in a different manner? Explain your answers.

    Problem 6
    Thurman Brothers Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $600,000 in overhead costs when a total of 10,000 direct labor hours were incurred. After implementing activity-based costing (ABC), the company's accountant identified the following related information:

    Activity Allocation Base Proportion of Overhead Cost
    Material delivery and handling Number of deliveries 30%
    Inspections Number of inspections 25%
    Supervision Hours of supervisor time 20%
    Purchasing Number of purchase orders 25%

    The number of activities for standard and custom-made cabinets are as follows:
    Standard Custom-made
    Number of deliveries 500 700
    Number of inspections 600 400
    Hours of supervisor time 1,000 2,000
    Number of purchase orders 800 400

    During the past year, Thurman accepted a customer order for a set of custom-made cabinets that would require the following:

    Direct labor hours -------------------------------------------- 45

    Number of deliveries ----------------------------------------- 4
    Number of inspections --------------------------------------- 5
    Hours of supervisor time ------------------------------------ 2
    Number of purchase orders --------------------------------- 4


    A. How much overhead would be applied to the job if traditional costing using direct labor hours as the cost driver were used?

    B. Using activity-based costing (ABC), what would be the overhead rate for each of the four activities?

    C. Using activity-based costing (ABC), what would be the total overhead applied to the above job?

    D. Compare the overhead applied using traditional costing to ABC costing and remark on the difference. Which one do you think is more accurate?

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    Solution Summary

    Excel file contains calculations of overhead allocated to the job using traditional costing system and activity based costing system .