Allocating costs with different cost drivers
Bangkok Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow.
2,000 labor hrs.
Percentage of use
Production of 800 sets of cutting shears, one of the company’s 20 products, took 200 labor hours and 6 setups and consumed 15 percent of the product-sustaining activities.
a. Had the company used labor hours as a companywide allocation base, how much overhead would it have allocated to the cutting shears?
b. How much overhead is allocated to the cutting shears using activity-based costing?
c. Compute the overhead cost per unit for cutting shears using first activity-based costing and then using direct labor hours for allocation if 800 units are produced. If direct product costs are $50 and the product is priced at 30 percent above cost (rounded to the nearest whole dollar), for what price would the product sell under each allocation system?
d. Assuming that activity-based costing provides a more accurate estimate of cost, indicate whether the cutting shears would be over- or underpriced if direct labor hours are used as an allocation base. Explain how over- or under costing can affect Bangkok’s profitability.
e. Comment on the validity of using the allocated facility-level cost in the pricing decision. Should other costs be considered in a cost-plus pricing decision? If so, which ones? What costs would you include if you were trying to decide whether to accept a special order?