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

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

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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.

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

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