G MedTech Inc. manufactures and sells diagnostic equipment used in the medical profession. Its job costing system was designed using an activitybased costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning four manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $20 per hour and that there were no beginning inventories. The following information was available for 2016, based on an expected production level of 371,429 units for the year:

Activity Cost Driver Budgeted Costs for 2016 Cost Driver Used as Allocation Base Cost Allocation Rate
Materials handling $ 3,200,000 Number of parts used $ 4.25 per part
Milling and grinding 9,000,000 Number of machine hours 12.50 per hour
Assembly and inspection 5,200,000 Direct labor hours worked 5.50 per hour
Testing 1,300,000 Number of units tested 3.50 per unit
The following production, costs, and activities occurred during the month of August:

Units Produced/Tested Direct Materials Costs Number of Parts Used Machine Hours Direct Labor Hours
54,000 $3,700,000 270,000 97,000 150,000
Required:

a. Calculate the total manufacturing costs and the cost per unit produced and tested during the month of August for MedTech, Inc.

G. Med tech Inc.

Derivation of Manufacturing Costs.

Material handling costs = $4.25 x 270,000 = $1,147,500

Milling & Grinding costs = $12.50 x 97,000 hours = $1,212,500

Assembly & inspection costs = $5.50 x 150,000 = $825,000

Testing costs = $3.50 x 54,000 = $189,000

Total Manufacturing costs based on activity rates = $3,374,000

B

The cost per unit produced and tested during the month of August for MedTech, Inc.

= total Manufacturing costs divided by Units produced and tested

= $3,374,000 / 54,000

= $62.50 Per unit.

C.

The key advantage in applying ABC method is in the appropriation / allocation of costs to all factors leading to production because each of these factors is generating costs and thus is an essential cost driver to the business.

Applying a standard rate on the other hand doesn't feedback to the organisation the cost line that's responsible for higher costs or lower profitability. And that makes it difficult when a business intends measuring and initiating productivity plans for profit enhancement .

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