Allocate Overhead Case Study

Activity-Based Costing to Allocate Overhead Costs
The managers at Beneteau Company decided to use activity-based costing to allocate overhead in view of the point that its benefits would surpass the cost. With ABC, This costing use different cost groups which are organized according to different activities to allocate overhead costs. The production and maintenance of the product includes all activities such as purchasing materials, inventory management, assembling parts and verifying final products. It must be noted that the cost of activities must be allocated to the product based on their usage.
The company has estimated total overhead costs to be $8,000,000.

There are major five steps involved in the process of activity based costing:
Step 5: Allocate overhead costs to products
The final overhead cost allocated to products is calculated by multiplying the predetermined overhead rate (step 4) by the actual cost driver quantity used.

The company has two offerings in their product portfolio– basic and deluxe sailboats. The company prefers to do a separate cost analysis for both offerings based on respective estimated cost drivers. The ABC costing provides a more transparent way to deal with costing of different products.

Basic Sailboat Deluxe Sailboat
Activity Predetermined Overhead Rate (in dollars) Estimated Annual Cost Driver Overhead Allocated Estimated Annual Cost Driver Overhead Allocated
Purchasing Materials 120 7,000 840,000 3,000 360,000
Inventory Management 800 1,000 880,000 9,000
The overhead cost for the basic and deluxe sailboat comes out to be $1000 and $3000 respectively assuming the company produces 5000 units of the basic product and 1000 units of the deluxe product.
Calculation of the product cost and the profit
As we know that the product cost has three components – labor, manufacturing and the raw materials. Assuming the raw materials cost $1000 for the basic product and $1300 for the deluxe product. In addition, direct labor costs are $600 and $750 for the basic and deluxe product respectively. Therefore, the total cost per unit associated with each of the product can be calculated as following: Basic Deluxe
Raw materials 1000 1300
Labor 600 750
Manufacturing 1004 2980
Total cost per unit 2604 5030 Now, the sales price of basic and deluxe products are $3200 and $4500 respectively. So in order to calculate the profits, we need to find the difference between the cost price and the selling