Activity Based Costing help.

[Tbrommen]

Hello,
I am having the toughest time trying to grasp the ABC concept for managerial accounting. I have very little accounting experience prior to this. I do enjoy the class and wish to eventually become a certified CMA, but this homework assignment is trying my patience. I came here hopefully to find someone that might be able to shed some light on what I am missing. When I asked my professor for help, she only rephrased the original questions.
Here is my problem:

Wichita Aero Works manufactures aircraft parts for small aircraft. The company’s business has consisted of 50% government contract work and 50% non-government work. Traditionally, the costs of the Material Handling Department have been allocated to direct material as a percentage of direct-material dollar value. Recently, the government contract work has been declining and government auditors have questioned the viability of this approach.

As the management accountant for Wichita Aero Works, you have been asked to determine a more appropriate method of allocating material handling costs. You have evaluated the work of the material handling department and have determined the following information:
The majority of the direct-material purchases for government contracts are high-dollar, low-volume purchases, while non-government work represent low-dollar, high-volume purchases.
Administrative departments such as accounting, HR and maintenance also use the services of the material handling department but have not been allocated charges for these services.
The components of the Material-Handling Department budget for 20XX are as follows:
Payroll - $300,000
Employee Benefits - $50,000
Telephone - $60,000
Materials and supplies - $10,000
Depreciation - $9,000
Direct-material budget:
Government - $3,000,000
Non-Government - $1,200,000
You have determined that purchase orders are the appropriate cost driver for allocating material handling costs. The estimated number of purchase orders to be processed in 20XX is as follows:
Government Contracts - 100,000
Non-Government Contracts - 225,000
Accounting - 2,000
Marketing - 1,500
Maintenance - 3,500
Total - 332,000

Questions:

1. Calculate the material handling rate that would have been used based on the traditional allocation.
2. Calculate the material handling rate to be allocated on a per purchase order basis.
3. Calculate the material handling costs assigned to government contracts based on the traditional method.
4. Calculate the material handling costs assigned to government contracts based on the ABC method.

The answers I have come up with are:
1. 429,000 / 4,200,000 = 10.21% handling rate based on traditional allocation of $4.2M in direct material.
2. 429,000 / 332,000 = $1.29 handling rate on a per purchase order basis.
3. 429,000 x 30.12% = $129,214.80 in handling costs for government contracts under traditional allocation.
4. 429,000 x 71.43% = $306,434.70 in handling costs for government contracts using ABC.

I have also attached a spread sheet that I used to find all of my information.

Any help is SOO greatly appreciated.

 

[Triest123]

Any help is SOO greatly appreciated.[/QUOTE]


1. 429,000 / 4,200,000 = 10.2143% of material costs

2. 429,000 / 325,000 = $1.32 per purchase order
(note : As the question mentions that the material handling costs do not allocate to
the administrative department, the purchase order for Accounting/ Marketing/ Maintenance should be excluded)

3. The material costs used in Government contracts is 3,000,000
So the material handle costs allocated to the Government contracts
is 3,000,000 x 10.2143% = 306,429

[note. The material handle costs allocated to the Non-Government contracts
is 1,200,000 x 10.2143% = 122,571, (the total of material handling costs
is 306,429+122,571 = 429,000]

4. The number of purchase orders process in the Government contracts is 100,000
so the material handle costs allocated to the Government contracts
= 100,000 x $1.32 per purchase order
= $132,000

[note. The material handle costs allocated to the Non-Government contracts
is 225,000 x $1.32 per purchase order = 297,000 (the total of material handling costs
is 132,000 + 297,000 = 429,000]


You can see that the answer for Q3 & Q4 is base on the allocation rate in Q1 & Q2
respectively.

 

[Tbrommen]

Oh my gosh, you are a complete life saver! Looking at it in such simple terms, it makes complete sense! Thank you so very much!

 

[Tbrommen]

Well just to post an update, my professor originally gave me a 60% on the assignment for effort because she said all of my calculations were wrong. After another student corrected her math, it rose to an 80%. The feedback answers I received were as follows:

1. 300,000 + 50,000 + 60,000 + 10,000 + 9,000 / 3,000,000 + 1,200,000 = 10.2%
2. 300,000 + 50,000 + 60,000 + 10,000 + 9,000/332,000 = 1.29
3. 3,000,000 x 10.2 = 306,000
4. 100,000 x 1.29 = $129,000

Thanks for all the help!

 

[joshuamh2]

I love it
I am in her class and when I ask for help she just repeats the instructions usually using bigger words.

 

[QBslave]

Former ABC consultant here. There are few "Right" or "Wrong" answers to ABC systems, only "Good", "Better" and "Best". Sadly, your instructors probably don't know what Activity-Based Costing is, because it is a concept, not a formula. OP has the concept, but is being asked to define the answer in antiquated terms. Tough to do. If the gov. wants a "Material Handling Rate", then you do it the old-fashioned way, pool and base.