Skip to main content
Business LibreTexts

4.6: Activity-based costing for a manufacturing business to estimate factory overhead

  • Page ID
    44225
  • \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

    Example

    Speed Rider, Inc. manufactures golf carts and go karts. The company budgeted $562,000 for the year for factory overhead and assigned it to four activities: fabrication, $195,000; assembly, $160,000; setup, $138,000; and inspection, $84,000. The company plans to produce 500 golf carts and 700 go karts during the year.

    The activity-base usage quantities for each product by each activity are as follows:

     

    Fabrication

    Assembly

    Setup

    Inspection

    Golf cart

    1,800 dlh

    1,600 dlh

    200 setups

    700 inspections

    Go kart

    1,200

    2,400

    400

    500

    Determine the activity-based factory overhead per unit for each product.

    1. Calculate the rate for each activity

      Fabrication

      $195,000 / (1,800 + 1,200)

      = $65 per direct labor hour

      Assembly

      $160,000 / (1,600 + 2,400)

      = $40 per direct labor hour

      Setup

      $138,000 / (200 + 400)

      = $230 per setup

      Inspection

      $ 84,000 / (700 + 500)

      = $70 per inspection

    2. Calculate the total overhead for each vehicle by adding its four overhead costs.

      Golf cart

      ($65 x 1,800 dlh)

      +

      ($40 x 1,600 dlh)

      +

      ($230 x 200 setups)

      +

      ($70 x 700 inspections)

         
       

      $117,000

      +

      $64,000

      +

      $46,000

      +

      $49,000

      =

      $276,000

      Go kart

      ($65 x 1,200 dlh)

      +

      ($40 x 2,400 dlh)

      +

      ($230 x 400 setups)

      +

      ($70 x 500 inspections)

         
       

      $78,000

      +

      $96,000

      +

      $92,000

      +

      $35,000

      =

      $301,000

    3. Calculate the overhead per vehicle by dividing total cost for all units by the number of units budgeted.

      Golf cart

      $276,000 / 500 units

      =

      $552 factory overhead per jet ski

      Go kart

      $301,000 / 700 units

      =

      $430 factory overhead per snowmobile


    This page titled 4.6: Activity-based costing for a manufacturing business to estimate factory overhead is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.