ABC costing focuses on allocation of overhead costs. It is an expansion of the plant-wide and the departmental methods of fixed cost allocation. The plantwide and the departmental rates are based on functional rationale of allocation rather than consumption of overhead cost. The consumption rationale approach, basically argues that a product or a service should not be charged with an overhead cost that it does not consume.
ABC is based on the rationale that there multiple sources of overhead costs and there are multiple drivers of overhead costs. If this is so, then we should have multiple cost pools and multiple basis of charging overhead costs, thus multiple PHOAR's. Therefore a product will be charged overhead on the basis of its consumption of these multiple basis of allocation. Apply this concept to the problem below.
Use the following information for questions 1and 2.
Gale Corporation manufactures windsocks. The business recently decided to adopt an ABC accounting system. The following activities have been identified:
Cost Driver Chosen Conversion Cost Per Unit
Activity as Allocation Base of Allocation Base
Materials handling Number of parts $ 1.00
Machining Machine hours 60.00
Packaging Number of finished units 2.00
Each windsock requires three parts and spends five minutes in the machining department. The total cost of direct materials and direct labor is $3.50 per windsock. Gale produces 20,000 windsocks each year and sells them at 140% of cost.
1.The total cost of producing the 20,000 windsocks is:
2. The selling price per windsock is: