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Activity-based costing versus traditional overhead allocation methods. Woodruff Industries manufactures and sells custom-made coffee tables. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $15 per hour and that there were no beginning inventories. The following information was available for 2004, based on an expected production level of 50,000 units
for the year:
Activity
Budgeted
Cost Driver Used
Cost
(Cost Driver)
Costs for 2004
as Allocation Base
Allocation Rate
Materials handling
$ 250,000
Number of parts used
$ 0.20 per part
Cutting and lathe work
1,750,000
Number of parts used
1.40 per part
Assembly and inspection
4,000,000
Direct labor hours
20.00 per hour
The following production, costs, and activities occurred during the month of July:
Units
Direct
Number
Direct
Produced
Materials Costs
of Parts Used
Labor Hours
3,200
$107,200
70,400
13,120
Required:
a. Calculate the total manufacturing cost and the cost per unit of the coffee tables produced during the month of July (using the activity-based costing approach).
b. Assume instead that Woodruff Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity-based costing system described above). Calculate the total manufacturing cost and the cost per unit of the coffee tables produced during the month of July. (Hint: You will need to calculate the predetermined overhead application rate using the total budgeted overhead costs for 2004.)
c. Compare the per unit cost figures calculated in parts (a) and (b) above. Which approach do you think provides better information for manufacturing managers? Explain your answer.
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