ACTIVITY BASED

COSTING
SAMPLE PROBLEM
The budgeted manufacturing overhead costs of JAYE CHEE-OH
Company for 2018 are as follows:
Type of Cost Cost Amount
Electrical Power P 1,000,000
Work Cells 6,000,000
Materials Handling 2,000,000
Quality Control Inspections 2,000,000
Product Runs (machine setups) 500,000
Total Budgeted Overhead Costs P 11,500,000
For the last 5 years, the cost accounting department has been
charging overhead production costs based on machine hours. The
estimated budgeted capacity for 2018 is 2,000,000 machine hours.
The president of the Jaye Chee-oh Company recently attended a
seminar on activity-based costing. He now believes that ABC results
in more reliable cost data that, in turn, will give the company an
edge in pricing over its competitors. At the president’s request, the
production manager provided the following data regarding expected
2018 activity for the cost drivers of the preceding budgeted
overhead costs.
Type of Cost
Electrical Power
Work Cells
Materials Handling
Quality Control Inspections
Product Runs (machine setups)
Activity Drivers
200,000 kilowatt hours
1,200,000 square feet
500,000 material moves
400,000 inspections
50,000 product runs
The Vice President of marketing received an offer to sell 5,000 doors to a local construction
company. The VP asked the head of the cost accounting to prepare cost estimates for producing
the 5,000 doors. The head of cost accounting accumulated the following data concerning
production of 5,000 doors:

Direct Material Cost P200,000

Direct Labor Cost 400,000
Machine hours 10,000
Direct labor hours 20,000
Electric Power-kilowatt hours 2,000
Work Cells – square feet 12,000
Number of material handling moves 120
Number of quality control inspections 60
Number of product runs (setups) 30
Requirements
1. What is the predetermined overhead rate if the traditional measure of machine hours is
used?
2. What is the manufacturing cost per door as presently accounted for?
3. What is the manufacturing cost per door under the proposed Activity Based Costing method?