Activity-Based Costing (ABC), Essay Example

Calculation of the manufacturing overhead rate based on labor hours and machine hours (two separate computations).

Manufacturing overhead rate based on labor hours

Total number of labor hours = 5+25 = 30

Number of hours on Millennium Surf Kit = 5

Manufacturing overhead rate to allocating manufacturing costs to Millennium Surf Kits = 5/30

= 1/6

Number of hours on Professional board = 25

Manufacturing overhead rate to allocating manufacturing costs to professional board = 25/30

= 5/6

Manufacturing overhead rate based on machine hours

Total number of machine hours = 7,500+4,000 = 11,500

Number of hours on Millennium Surf Kit = 7,500

Manufacturing overhead rate to allocating manufacturing costs to Millennium Surf Kits = 7,500/11,500

Number of hours on Professional board = 4,000

Manufacturing overhead rate to allocating manufacturing costs to professional board = 4,000/11,500

To determine the cost to manufacturing one unit of each model using two different traditional approaches; direct labor hours and machine hours.

Using direct labor hours

Using direct machine hours

To determine the cost to manufacturing one unit of each model using the activity-based costing data presented above.

Allocation of manufacturing overheads based on activity based costing and the provided information.

Cost to manufacturing a unit of each model

Is the millenium surf kit as profitable as the company may think it is based on its present system?

Comparison of the operating profit per unit using the three methods above

As the calculation above shows the millennium surf kit is a profitable product. Its profitability using the Activity Based Costing does not vary much with that arrived at by using the traditional methods.

What should Millennium Manufacturing Company do to improve its profitability?

To improve on its profitability, the Millennium Manufacturing Company should produce and sell more of the Millennium Surf Kit since the product is more profitable. This company should look for more markets for this product.

If the demand of the professional board is price inelastic, the company can improve its profitability by increasing the selling price of this product.