42) Murphy's Machine Works manufactures custom equipment. Murphy's Machine Works currently uses a plant-wide overhead rate, based on direct labour hours, to allocate its $2,500,000 of manufacturing overhead to individual jobs. However, Sean Murphy, owner and CEO, is considering refining the company's costing system by using departmental overhead rates. Currently, the Machining Department incurs $1,500,000 of MOH while the Assembly Department incurs $1,000,000 of MOH. Sean has identified machine hours (MH) as the primary MOH cost driver in the Machining Department and direct labour (DL) hours as the primary cost driver in the 600 and 601 on July 15. Both jobs incurred a total of 9 DL hours throughout the entire production process. Job 600 incurred 5 MH in the Machining Department and 6 DL hours in the Assembly Department (the other DL hour occurred in the Machining Department). Job 601 incurred 8 MH in the Machining Department and 7 DL hours in the Assembly Department (the other two DL hours occurred in the Machining Department).
Requirements
1. Compute departmental overhead rates, assuming Sector expects to incur 30,000 MH in the Machining Department and 40,000 DL hours in the Finishing Department during the year.
2. Using the departmental rates how much manufacturing overhead would be allocated to Job 550 and to Job 555.
1) ABC costing is generally more accurate than traditional cost systems.
2) It is easier to allocate indirect costs to the products that caused those costs if you use the ABC
system rather than traditional costing systems.
3) Companies that use ABC trace direct materials and direct labor to cost objects just as in traditional costing systems.
4) Two main benefits of ABC are (1) more accurate product cost information and (2) more detailed information on the costs of activities and the drivers of those costs.
5) The cost allocation rate for each activity is equal to the estimated total manufacturing overhead costs of the activity multiplied by the estimated total quantity of the cost allocation base.