Activity Based Costing Vs. Conventional Costing Jackson Ltd

Activity Based
Costing Vs.
Conventional Costing

a) Jackson Ltd. currently uses a single plant wide overhead rate based on direct labour
hours. The overhead rate is calculated as follows:
Predetermined overhead rate = total manufacturing overhead / total number of direct labour
hours
Total manufacturing overhead = $816,000
Total direct labour hours
Fred Martha
Production quantity 1000 units 5000 units
Direct labour 2 per unit 3 per unit
Total direct labour hours 2000 hours 15000 hours
The total direct labour hours are 17000.
Predetermined overhead rate = $816,000 / 17000
= $48
Cost per unit as per the conventional approach:
Fred Martha
Direct Material per unit $40 $60
Direct labour per unit $30 $45
Manufacturing overhead 2 hours 3 hours
Pre-determined overhead rate $48
Manufacturing overhead per
unit
$96 $144
Total cost per unit $166 $249
b) Cost per activity for each activity pool
Activity cost
pool
Manufacturing
overhead budget
Cost driver Budgeted level
of cost driver
Cost per
activity
Machine related $450,000 Machine hours 9000 hours $50

costs
Set up and
inspection
$180,000 Number of
production runs
40 runs $4,500
Engineering $90,000 Engineering
change orders
100 change
orders
$900
Plant related
costs
$96,000 Square footage
of space
1920 sq. ft. $50
c) Product cost per unit for Fred and Martha using activity based costing
The product cost comprises of the material, labour and manufacturing overhead costs. The
manufacturing overhead costs for each product in activity based costing are calculated by
calculating the cost per activity. The total of activity cost is the manufacturing overhead cost.
1) Machine related costs
Fred Martha Total
Machine hours 4 hours 1 hour
Production quantity 1,000 units 5,000 units
Total machine hours
required
4000 hours 5000 hours 9000 hours
Cost per machine hour $50 $50
Machine related costs $200,000 $250,000 $450,000
Cost per unit $200 $50
2) Set and inspection costs
Fred Martha Total
Unit Batch 50 units 250 units
Production quantity 1,000 units 5,000 units
Number of production
runs
20 runs 20 runs 40 runs
Cost per production
run
$4500 $4500