[MIHAI2008]

Ida Draperies makes custom draperies for homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools.

Overhead costs:
Production overhead $120,000
Office expense $120,000
Total $240,000

Distribution of resource consumption:
Activity Cost Pools
Making Job
Drapes Support Other Total
Production overhead 45% 35% 20% 100%
Office expense 10% 60% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Annual Activity
Making drapes 3,000 yards
Job support 120 jobs
Other Not applicable

Required:
a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Making Drapes Job Support Other Total
Production overhead
Office expense
Total






b. Compute the activity rates (i.e. cost per unit of activity) for the Making Drapes and Job Support activity cost pools by filling in the table below:

Making Drapes Job Support Other Total
Production overhead
Office expense
Total

c. Compute the profitability of a job that involves making 83 yards of drapes, direct materials and direct labor cost of $2,350 and sales price of $5,000.

d. Assume that a sister Drapery company, Ora Draperies, also uses activity based costing and has computed it’s activity rates as follows:

Making Drapes $15.00/yard

Job Support $1,200/job

What do these results suggest about the Ida Drapery company? What actions would you take next? Give at least three examples.

e. List at least three advantages ABC has over traditional cost allocation methods. List at least two disadvantages.

[assistance]

Nn