(a) How do you calculate manufacturing overhead costs to the two products using activity based
costing (ABC).
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Thank you, Ms. Sue.
You're welcome, Fred.
To calculate manufacturing overhead costs using activity-based costing (ABC), you need to follow these steps:
1. Identify overhead activities: Determine all the activities involved in the manufacturing process that contribute to overhead costs. These activities can include setup time, machine maintenance, quality control, and material handling.
2. Measure activity usage: Determine the amount or quantity of each activity used in producing the products. This can be measured using various methods, such as machine hours, labor hours, or the number of setups.
3. Assign costs to activities: Determine the total costs associated with each activity. This includes both direct costs (such as labor and materials) and indirect costs (such as rent, utilities, and maintenance).
4. Identify cost drivers: Identify the factors that drive each activity's costs. For example, the cost driver for setup time could be the number of setup operations performed, while for machine maintenance, it could be the number of hours of machine usage.
5. Allocate costs to products: Allocate the overhead costs to the two products based on their usage of the activities. Multiply the cost driver usage of each product by the cost per unit of the respective activity.
6. Calculate the overhead cost per product: Sum up the allocated costs for each activity to determine the total overhead cost for each product.
By following these steps, you can calculate the manufacturing overhead costs for the two products using activity-based costing.