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Benefits Of Using The Cost Driver Rates

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Utilizing Will’s old costing method, the only difference between the costs (per gallon) of Polynesian Fantasy and Vanilla ice cream product is the 20 cent difference in the cost of direct material (DH). The overhead rate (OH) is 200 percent of direct labor (DL) dollars. Seeing that the direct labor dollars are $300,000, the next step in calculating the overhead rate is multiplying 300,000 by 2.00, or 200%, which results in $600,000. To ensure the arithmetic is correct, divide $600,000 by the $300,000 which equates to 2.00, or 200%, indicating the arithmetic is in fact correct. The new costing method (Louise’s suggestions) calculates the cost driver rates which are derived from dividing activity expenses by budgeted activity level for the cost driver. For example, to calculate the purchasing cost driver rate simply divide $80,000 by 909 to get an outcome of $88.01. Similarly, to calculate the material handling cost driver rate divide $95,000 by 1,846 to get a result of $51.46. Continuing the same method of calculation for the rest of the activities will determine the rest of the cost driver rates. Adding all of the budgeting costs together results in the total manufacturing overhead costs which is, in this particular instance, is $600,000.
The new costing method (Louise’s suggestion) displays the “activity-based” cost accounting methods. There are several steps to take when calculating the cost per gallon for Polynesian Fantasy and Vanilla using the new costing
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