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Cost Drivers in a Given Situation

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Shannon Industries manufactures two products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volumes:
Production Volume in units A: 2,500
Production Volume in units of B: 5,000
Direct material per unit A: \$40
Direct materials per unit of B: \$60
Direct Labor for A: 2 hours @ \$12 per hour
Direct Labor for B: 3 hours @ \$12 per hour
Manufacturing Overhead for A: 2 hours @ \$93
Manufacturing Overhead for B: 3 hours @ \$93

Manufacturing overhead is currently computed by spreading overhead of \$1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available:

Cost Pool: Cost
General Factory 1,500,000
Machine Processing 120,000
Setups 240,000
= \$1,860,000

The cost driver for the three cost pools are: number of setups, direct labor hour and machine hours, respectively.

Product A uses 100 setups, 5,000 direct labor hours and 2,200 machine hours. Product B uses 20 setups, 15,000 direct labor hours and 800 machine hours. Product C uses 120 setups, 20,000 direct labor hours and 3,000 machine hours. The company determines selling prices by adding 40% to a product's total cost. Compute B's total per-unit cost and selling price under activity-based costing. (Partial credit is given, if necessary.)

Solution Preview

Shannon Industries manufactures two products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volumes:
Production Volume in units A: 2,500
Production Volume in units of B: 5,000
Direct material per unit A: \$40
Direct materials per unit of B: \$60
Direct Labor for A: 2 hours @ \$12 per hour
Direct Labor for B: 3 hours @ \$12 ...

Solution Summary

The expert examines the cost drivers in a given situation.

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