Home / Questions / Thurman Brothers Construction manufactures and installs standard and custom-made cabinetry
Thurman Brothers Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $600,000 in overhead costs when a total of 10,000 direct labor hours were incurred. After implementing activity-based costing (ABC), the company’s accountant identified the following related information:
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Activity |
Allocation Base |
Proportion of Overhead Cost |
|
Material delivery and handling |
Number of deliveries |
30% |
|
Inspections |
Number of inspections |
25% |
|
Supervision |
Hours of supervisor time |
20% |
|
Purchasing |
Number of purchase orders |
25% |
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|
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The number of activities for standard and custom-made cabinets are as follows:
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|
Standard |
Custom-made |
|||
|
Number of deliveries |
500 |
700 |
|||
|
Number of inspections |
600 |
400 |
|||
|
Hours of supervisor time |
1,000 |
2,000 |
|||
|
Number of purchase orders |
800 |
400 |
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During the past year, Thurman accepted a customer order for a set of custom-made cabinets that would require the following:
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Direct labor hours -------------------------------------------- |
45 |
|
|
|
|
Number of deliveries ----------------------------------------- |
4 |
|
Number of inspections --------------------------------------- |
5 |
|
Hours of supervisor time ------------------------------------ |
2 |
|
Number of purchase orders --------------------------------- |
4 |
|
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|
Required:
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A. |
How much overhead would be applied to the job if traditional costing using direct labor hours as the cost driver were used? |
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B. |
Using activity-based costing (ABC), what would be the overhead rate for each of the four activities? |
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C. |
Using activity-based costing (ABC), what would be the total overhead applied to the above job? |
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D. |
Compare the overhead applied using traditional costing to ABC costing and remark on the difference. Which one do you think is more accurate? |
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