Q1. Inverta Inc. manufactures two types of inverters – 1. Power and 2. Normal.
Following are the expenses incurred on manufacturing:
| Power $ | Normal $ | ||
| Direct Material per Unit | 25 | 15 | |
| Direct Labor Cost | 70 | 30 | |
| Direct Labour Time | 2 hours | 8 hours | |
| Units | 12000 | 40000 | |
Estimated overheads for the time period are:
| Activity | Cost | Overhead Cost for | Units of Activity | |||
| Cost Pool | Driver | Activity | Power Normal | |||
| Repair cost pool | Orders | 108000 | 200 | 50 | |
| Set-up cost pool | Runs | 72000 | 150 | 50 | |
| Heating cost pool | Sq. Ft. | 24360 | 34000 | 6000 | |
| Machine cost pool | Hours | 45240 | 45000 | 5000 | |
| Total Overhead | 249600 | ||||
1. Consider that overhead is allocated on the basis of direct labor hours, calculate cost price per unit using pre-determined overhead application rate.
2. Now using the activity base costing, calculate cost price per unit.
3. Compare the pricing from two different methods –POHR and ABC and suggest which method do you think give more precise answer. What strategies could have gone wrong by adopting POHR?
4. How supervisors would make an assessment of cost driver to use for ABC costing?