Chapter 4, Problem 4.25AE

Use ABC to allocate manufacturing overhead (Learning Objective 2)

Several years after reengineering its production process, Dettling Corporation hired a new controller, Alana Metzgar. She developed an ABC system very similar to the one used by Dettling’s chief rival. Part of the reason Metzgar developed the ABC system was because Dettling’s profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system, the company had used a plantwide overhead rate based on direct labor hours that was developed years ago.

For the upcoming year, Dettling’s budgeted ABC manufacturing overhead allocation rates are as follows:

Activity	Allocation Base	Activity Cost Allocation Rate
Materials handling	Number of parts	$ 4.50 per part
Machine setup	Number of setups	$325.00 per setup
Insertion of parts	Number of parts	$ 31.00 per part
Finishing	Finishing direct labor hours	$ 51.00 per hour

The number of parts is now a feasible allocation base because Dettling recently installed a plantwide computer system. Dettling produces two wheel models: Standard and Deluxe. Budgeted data for the upcoming year are as follows:

	Standard	Deluxe
Parts per wheel	4.0	6.0
Setups per 1,000 wheels	20.0	20.0
Finishing direct labor hours per wheel	1.0	3.0
Total direct labor hours per wheel	2.7	3.8

The company’s managers expect to produce 1,000 units of each model during the year.

Requirements

1. 1. Compute the total budgeted manufacturing overhead cost for the upcoming year.
2. 2. Compute the manufacturing overhead cost per wheel of each model using ABC.
3. 3. Compute the company’s traditional plantwide overhead rate. Use this rate to determine the manufacturing overhead cost per wheel under the traditional system.