Destin Brass Products Company
Activity Based Costing

Prepared by: Heidi Meilinger

Standard System

Step 4:
Indirect Cost Pool

Step 3:
Cost Allocation Base

Step 5:
439% of direct run labor cost

Step 1:
Cost objects:
Valves, pumps,
And flow controllers

Step 2:
Direct Costs

Revised System

Step 4:
Indirect Cost
Pool

Step 3:
Cost Allocation
Base

48% of direct $42.59 per direct manufacturing manufacturing material cost machine hour

Step 1:
Cost objects: Step 7
Valves, pumps,
And flow controllers

Step 2:
Direct costs

Activity Based Costing System

Step 4:
Indirect cost
Pool

Step 3:
Cost-
Allocation
Base

$25 per hour $16 per hour $155.04 per # $1550.39 per # $2,000 per # $2.78 per Of use per run of transactions of transactions of transactions machine hour

Step 1:
Cost objects:
Valves, Pumps,
And flow
Controllers

Step 2:
Direct Costs

1.) The schedules above show the rates of the valves, pumps, and flow controllers if they were costed using an activity based costing system. With this system there are a total of seven overhead activities, each having their own cost allocation base, and only two direct costs. Execution of this system would cause a cut in pricing for the pumps, which would help the company maintain a competitive edge in this market; however, there would not be much change in valve prices and the flow controller’s price would almost double from what it was before. These prices, even though they may seem drastic, will be more realistic for the market in which Destin Brass is selling to.

2.) As is shown above, each of the products is costed by the same amount for direct materials and direct labor. The only difference, in the direct costs, is that under the revised costing system set-up labor is also considered a direct cost and is allocated to each product under this system.

The main difference in the costing procedure in each of these systems is how the overhead is allocated. Beginning with the standard costing system, there are seven indirect costs (as shown above) which come to a total cost of $682, 688. To obtain the overhead rate for the indirect costs one would divide the total indirect cost by total run labor, $155,600; this would then make a rate of 439%. To allocate the overhead to each product one would then have to multiply the rate, 439%, by the cost of direct labor that was allocated to each product.

Under the second system, revised costing, there are two overhead categories: material related overhead and other overhead. Material related overhead is comprised of two indirect costs and other overhead is comprised of four indirect costs (as shown above). The overhead rate for material related overhead is calculated by taking the total indirect costs for material related and dividing it by the total costs of material, $458,000; this would then make a rate of 48%. To allocate this overhead to each product one would have to multiply the rate, 48%, by the direct material cost that was allocated to each product. The overhead rate for the other overhead is figured by taking the total indirect costs for the other overhead and dividing it by the total amount of machine usage, 10,800 hours; this would then make a rate of $42.59 per machine hour. Yet again, this amount would be allocated to each product by multiplying the rate, $42.59, to the amount of machine usage consumed by each product.

The final system, activity based costing, is very different from the other two systems in that it does not total up the indirect costs and then divide it to make one single overhead rate. Instead, each indirect cost has their own allocation base, which in turn creates their own rate; each cost is then allocated to the products according to each