Lilly Corp

Essay

Lilly Corp. manufactures office supplies that it specifically creates for recent college graduates. One of their most popular items in recent years is an annual planner that is accompanied by accessories such as stickers and highlighters. Lilly currently uses a single plant-wide rate of $14 per Direct Labor (DL) hour to allocate their Manufacturing Overhead (MOH) costs. Sarah, the controller, would like to determine whether a switch to Activity-Based Costing (ABC) would prove to be a beneficial planning tool for Lilly Corp. moving forward. Sarah has identified three key activities that would be used for ABC: Production, Supervisor Wages, and Quality Inspections. Sarah has compiled the following budgeted MOH cost data for the annual planner:
The actual usage of resources for manufacturing the annual planner includes $27,360 in DM costs; 37,000 DL hours; 28,500 machine hours; 4,500 supervisor hours; and 9,800 inspection hours.
a. Allocate MOH costs to the production of the annual planner using the previous plant-wide rate.
b. How will MOH costs be allocated to the production of the annual planner using ABC rates?
c. What could account for the difference between these two different allocations? Which should Sarah advise Lilly Corp. to use moving forward?