Assume Heartwood Cabinets uses ABC costing to apply overhead to its products. The cost accountants have identified two different cost pools. The first includes all the costs associated with manufactur

Question

Assume Heartwood Cabinets uses ABC costing to apply overhead to its products. The cost accountants have identified two different cost pools. The first includes all the costs associated with manufacturing cabinets. The second includes all the costs associated with machine setup, as follows: Heartwood Manufacturing Overhead
(
based on prior year data
)
Manufacturing Operations Overhead CostsUnits to be produced 
(
from Production budget
)
 
1
0
5
,
0
0
0
 
Labor hours required for planned production
 
1
4
5
,
5
0
0
 
Variable Overhead

Indirect materials and supplies$ 
3
.
0
0
4
3
6
,
5
0
0
 
Materials handling$ 
1
.
0
0
1
4
5
,
5
0
0
 
Indirect labor$ 
1
.
2
5
1
8
1
,
8
7
5

$ 
7
6
3
,
8
7
5
.
0
0
Fixed manufacturing overhead

Factory rent
 
$ 
2
4
,
0
0
0
.
0
0
 
Machine depreciation
 
$ 
1
3
,
0
0
0
.
0
0
 
Supervisor labor
 
$ 
3
0
,
0
0
0
.
0
0
 
Utilities
 
$ 
1
9
,
9
7
6
.
0
0
 
Maintenance and repairs
 
$ 
9
,
9
9
9
.
0
0
 
Property taxes
 
$ 
1
2
,
1
5
0
.
0
0

$ 
1
0
9
,
1
2
5
.
0
0

$ 
8
7
3
,
0
0
0
.
0
0
 ﻿Machine Setup Overhead CostsLabor hours required for machine setup
 
1
5
,
0
0
0
 
Variable Overhead

Supplies$ 
1
0
.
0
0
$ 
1
5
0
,

VIPSolutions · Accepted Answer

# Allocation of Overhead Costs for Pine Cabinets Using ABC Costing

This solution involves calculating the overhead costs allocated to each type of pine cabinet based on activity-based costing (ABC). The process includes calculating the predetermined overhead rates for manufacturing operations and machine setup, then applying these rates to each product.

---

## Step 1: Data Summary

### Production Data
| Product                | Units to be produced | Direct labor hours per unit | Machine setup hours per unit |
|------------------------|----------------------|------------------------------|------------------------------|
| Pine-Arch              | 14,500               | 1                            | .14                         |
| Pine-Cathedral         | 15,000               | 1                            | .14                         |
| Pine-Shaker            | 20,000               | 1.5                          | .14                         |
| Pine-Slab              | 25,000               | 1                            | .14                         |
| Pine-Beadboard        | 30,500               | 2                            | .14                         |

### Overhead Costs
- **Manufacturing Overhead (Total):** \$1,683,000
- **Machine Setup Overhead (Total):** \$810,000

### Total Direct Labor Hours (for all products)
$$ 145,500 \text{ units} \times \text{ labor hours per unit} $$

Total labor hours for all products:
- Pine-Arch: $14,500 \times 1 = 14,500$
- Pine-Cathedral: $15,000 \times 1 = 15,000$
- Pine-Shaker: $20,000 \times 1.5 = 30,000$
- Pine-Slab: $25,000 \times 1 = 25,000$
- Pine-Beadboard: $30,500 \times 2 = 61,000$

Total labor hours:
$$ 14,500 + 15,000 + 30,000 + 25,000 + 61,000 = 145,500 $$

---

## Step 2: Calculate Predetermined Overhead Rates

### Manufacturing Operations Overhead Rate
$$
\text{Rate} = \frac{\text{Total Manufacturing Overhead}}{\text{Total Labor Hours}} = \frac{\$1,683,000}{145,500} = \$11.56 \text{ per labor hour}
$$

### Machine Setup Overhead Rate
$$
\text{Rate} = \frac{\text{Total Machine Setup Overhead}}{\text{Total Setup Hours}} = \frac{\$810,000}{15,000} = \$54.00 \text{ per setup hour}
$$

---

## Step 3: Calculate Overhead Allocation per Product

### Manufacturing Overhead per Product
$$
\text{Manufacturing OH} = \text{Labor hours per unit} \times \$11.56
$$
- Pine-Arch: $1 \times \$11.56 = \$11.56$
- Pine-Cathedral: $1 \times \$11.56 = \$11.56$
- Pine-Shaker: $1.5 \times \$11.56 = \$17.34$
- Pine-Slab: $1 \times \$11.56 = \$11.56$
- Pine-Beadboard: $2 \times \$11.56 = \$23.12$

### Machine Setup Overhead per Product
$$
\text{Setup OH} = \text{Setup hours per unit} \times \$54.00
$$
- Pine-Arch: $.14 \times \$54 = \$7.56$
- Pine-Cathedral: $.14 \times \$54 = \$7.56$
- Pine-Shaker: $.14 \times \$54 = \$7.56$
- Pine-Slab: $.14 \times \$54 = \$7.56$
- Pine-Beadboard: $.14 \times \$54 = \$7.56$

---

## Step 4: Total Overhead Cost per Product

Multiply per-unit overheads by units to be produced:

| Product          | Manufacturing OH | Machine Setup OH | Total Overhead Cost     |
|------------------|--------------------|------------------|-------------------------|
| Pine-Arch        | $14,500 \times \$11.56 = \$167,820$ | $14,500 \times \$7.56 = \$109,620$ | \$277,440 |
| Pine-Cathedral   | $15,000 \times \$11.56 = \$173,400$ | $15,000 \times \$7.56 = \$113,400$ | \$286,800 |
| Pine-Shaker      | $20,000 \times \$17.34 = \$346,800$ | $20,000 \times \$7.56 = \$151,200$ | \$498,000 |
| Pine-Slab        | $25,000 \times \$11.56 = \$289,000$ | $25,000 \times \$7.56 = \$189,000$ | \$478,000 |
| Pine-Beadboard   | $30,500 \times \$23.12 = \$704,360$ | $30,500 \times \$7.56 = \$230,580$ | \$934,940 |

---

## **Final Summary**

| Product          | Total Overhead Cost ($) |
|------------------|-------------------------|
| Pine-Arch        | \$277,440               |
| Pine-Cathedral   | \$286,800               |
| Pine-Shaker      | \$498,000               |
| Pine-Slab        | \$478,000               |
| Pine-Beadboard   | \$934,940               |

**Note:** These figures reflect the overhead allocated to each product based on activity-based costing, considering both manufacturing operations and machine setup activities.

---

## **Conclusion**

Using ABC costing, overhead costs are allocated more accurately based on activity consumption (labor hours and setup hours), resulting in specific cost per product that informs pricing and profitability analysis.

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