Preparation Of Job Order For Manufacturing Unit

Question

Tom’s Manufacturing Company Ltd makes sophisticated custom parts on a job order basis. The company has two direct product cost categories: direct materials and direct labor. In the past, indirect manufacturing costs were allocated to products using a single indirect cost pool, allocated based on direct labor hours. The indirect cost rate was $ 230 per direct labor hour. The Manager (Mr. Bright) decided to switch from a manual system to software programs that release materials and signal machines when to begin working. Naturally thought was given to whether the existing costing would be suitable. After investigation, it was decided to adopt an activity based costing system. The manufacturing process has been organized into six activities, each with its own supervisor who is responsible for controlling costs. The following list indicates the activities, cost drivers and cost allocation rates.

Activity          

Cost Driver

Cost per unit of cost driver

Materials handling

Number of parts

$0.80

Milling

Machine hours

40.00

Grinding

Number of parts

1.60

Assembly

Hours spent in assembly

10.00

Inspection

Number of units produced

50.00

Shipping

Number of orders shipped

3,000.00

The company’s information system automatically collects the necessary data for these activities. The data for the first four jobs were as follows:

 

Job81

Job82

Job83

Job84

Direct materials cost

$19,400

$119,800

$9,700

$59,900

Direct labor cost

$1,500

$22,500

$750

$11,250

Number of direct labor hours

50

750

25

375

Number of parts

1,000

4,000

500

2,000

Number of machine hours

300

2,100

150

1,050

Number of job orders shipped

2

2

1

1

Number of units

20

400

10

200

Number of hours in assembly

4

60

2

30

Required:

(a) Under the conventional system previously used, calculate the manufacturing cost per unit for job orders 81, 82, 83 and 84.

(b) Under the new ABC system, calculate the manufacturing cost per unit for the four jobs.

(c) Compare the cost per unit for the four job orders calculated under both methods. Explain why the cost per unit under the conventional costing system is different from cost per unit under the ABC system.

(d) Explain why the choice of cost drivers is critical in an ABC system.

(e) Identify and explain to Mr Bright the possible advantages and disadvantages of adopting the

ABC system.

 

Summary

The question belongs to Accounting and it discusses about preparing a job order for a manufacturing unit. The calculations have been provided in the solution in detail.

Total Word Count NA

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