Managerial

Cost allocation lab

Compare a single plant-wide rate with activity-based costing.

Corvane Fluid Systems makes three valves in one plant. Low-volume products need many set-ups and inspections but few machine hours. Compare one plant-wide rate with activity-based costing.

Overhead cost pools

Machining — cost (driver: machine hours)

Machine set-ups — cost (driver: set-ups)

Quality inspection — cost (driver: inspections)

Plant-wide rate basis

Products and driver usage

Product	Units	Direct cost / unit	machine hours	set-ups	inspections
Standard valve	Standard valve units produced	Standard valve direct cost per unit	Standard valve machine hours	Standard valve set-ups	Standard valve inspections
Custom valve	Custom valve units produced	Custom valve direct cost per unit	Custom valve machine hours	Custom valve set-ups	Custom valve inspections
Micro valve	Micro valve units produced	Micro valve direct cost per unit	Micro valve machine hours	Micro valve set-ups	Micro valve inspections

Plant-wide rate

50.00 per machine hour

600,000.00 ÷ 12,000 machine hours

Activity rates

Machining: 30.00 per machine hour
Machine set-ups: 1,200.00 per set-up
Quality inspection: 480.00 per inspection

Overhead assigned under each method (each pool fully allocated; the last product absorbs rounding)
Product	Plant-wide	ABC	Plant-wide / unit	ABC / unit	Full cost / unit (ABC)	Under the plant-wide rate
Standard valve	400,000.00	283,200.00	40.00	28.32	70.32	Over-costed by 116,800.00
Custom valve	150,000.00	214,800.00	75.00	107.40	172.40	Under-costed by 64,800.00
Micro valve	50,000.00	102,000.00	100.00	204.00	242.00	Under-costed by 52,000.00
Total overhead	600,000.00	600,000.00	Both methods assign the same total; only the split between products changes.

Activity-based overhead by pool
Pool	Standard valve	Custom valve	Micro valve
Machining	240,000.00	90,000.00	30,000.00
Machine set-ups	24,000.00	72,000.00	48,000.00
Quality inspection	19,200.00	52,800.00	24,000.00

Cross-subsidy

Standard valve is over-costed by 116,800.00 (11.68 a unit): it subsidises the others under the plant-wide rate.
Custom valve is under-costed by 64,800.00 (32.40 a unit): it consumes more activity than its share of machine hours suggests, so other products carry part of its overhead.
Micro valve is under-costed by 52,000.00 (104.00 a unit): it consumes more activity than its share of machine hours suggests, so other products carry part of its overhead.

The subsidies net to zero. Per-unit amounts are rounded to the cent.

Learn it properly

Activity-based costing · Cost and Managerial Accounting

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