Chapter 5, Problem 5.34P

First-stage allocation, time-driven activity-based costing, manufacturing sector. Marshall Devices manufactures metal products and uses activity-based costing to allocate overhead costs to customer orders for pricing purposes. Many customer orders are won through competitive bidding based on costs. Direct material and direct manufacturing labor costs are traced directly to each order. Marshall’s direct manufacturing labor rate is $20 per hour. The company reports the following budgeted yearly overhead costs:

Wages and salaries	$480,000
Depreciation	60,000
Rent	120,000
Other overhead	240,000
Total overhead costs	$900,000

Marshall has established four activity cost pools and the following budgeted activity for each cost pool:

Activity Cost Pool	Activity Measure	Budgeted Total Activity for the Year
Direct manufacturing labor support	Number of direct manufacturing labor-hours	30,000 direct manufacturing labor-hours
Order processing	Number of customer orders	500 orders
Design support	Number of custom design-hours	2,490 custom design-hours
Other	Facility-sustaining costs allocated to orders based on direct manufacturing labor-hours	30,000 direct manufacturing labor-hours

Some customer orders require more complex designs, while others need simple designs. Marshall estimates that it will do 120 complex designs during a year, which will each take 11.75 hours for a total of 1,410 design-hours. It estimates it will do 180 simple designs, which will each take 6 hours for a total of 1,080 design-hours.

Paul Napoli, Marshall’s controller, has prepared the following estimates for distribution of the overhead costs across the four activity-cost pools:

Order 277100 consists of four different metal products. Three products require a complex design and one requires a simple design. Order 277100 requires $4,550 of direct materials and 80 direct manufacturing labor-hours

1. 1. Allocate the overhead costs to each activity cost pool. Calculate the activity rate for each pool

  Required

1. 2. Determine the cost of Order 277100.
2. 3. How does activity-based costing enhance Marshall’s ability to price its orders? Suppose Marshall used a simple costing system to allocate all overhead costs to orders on the basis of direct manufacturing labor-hours. How might this have affected Marshall’s pricing decision for Order 227100?
3. 4. When designing its activity-based costing system. Marshall uses time-driven activity-based costing system (TDABC) for its design department. What does this approach allow Marshall to do? How would the cost of Order 277100 have been different if Marshall had used the number of customer designs rather than the number of custom design-hours to allocate costs to different customer orders? Which cost driver do you prefer for design support? Why?