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