Question

Hickory Company manufactures two products-15,000 units of Product Y and 7,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $664,200 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z: Estimated Overhead Cost $ 221,108 11,000 MHs $107,100 $ 85,000 $ 251, 000 13,200 DLHS Expected Activity Activity Cost Pool Machining Machine setups Product design General factory Activity Measure Machine-hours Number of setups Number of products Direct labor-hours 210 setups 2 products Activity Measure Machine-hours Number of setups Number of products Direct labor-hours Product YProduct Z 7,100 60 3,900 150 1 1 8,100 5,100 Foundational 7-11 11. Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z? (Round your "Percentage" answers to 2 decimal place.) Product Y Product Z Manufacturing overhead %

Answer 1

11. Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z?

	Product Y		Product Z
Manufacturing overhead	61.36	%	38.64	%

The plantwide overhead rate is based on direct labor-hours. Therefore, total manufacturing overheads are allocated to Product Y and Product Z based on the direct labor-hours used by them.

Activity	Estimated cost
Machining	$            221,100
Machine setups	$            107,100
Product design	$                85,000
Geenral factory	$            251,000
TOTAL MANUFACTURING OVERHEAD (A)	$            664,200
TOTAL DIRECT LABOR HOURS (B)	13,200
OVERHEAD RATE (A) ÷ (B)	$ 50.3182

	Product Y	Product Z	Total
Direct labor-hours used (A)	8,100	5,100	13,200
Overhead rate (plant wide based on direct labor hours (B)	$                            50.3182	$                            50.3182
Allocated Manufacturing overhead (A) × (B)	$                     4,07,577.27	$                     2,56,622.73	$                     6,64,200.00
Percentage to total Manufacturing overhead	61.36%	38.64%	100.00%

EXTRA - Manufacturing overhead allocation based on ABC

Activity cost pool	Estimated overhead cost (A)	Activity measure	Expected activity (B)	Cost allocation rate (A) ÷ (B)
Machining	$            2,21,100	Machine-hours	11,000 MHs	$               20.10
Machine setups	$            1,07,100	Number of setups	210 setups	$             510.00
Product design	$                85,000	Number of products	2 products	$       42,500.00
General factory	$            2,51,000	Direct labor-hours	13,200 DLHs	$          19.0152
	$            6,64,200

Activity	Product Y	Product Z	Total
Machining
Cost allocation rate (i)	$                  20.10	$                  20.10
Machine hours (ii)	7,100	3,900	11,000
Total Machining costs (i) × (ii)	$      142,710.00	$          78,390.00	$      221,100.00
Machine setups
Cost allocation rate	$                510.00	$                510.00
Number of setups	60	150	210
Total Machine setup costs	$          30,600.00	$          76,500.00	$      107,100.00
Product design
Cost allocation rate	$          42,500.00	$          42,500.00
Number of products	1	1	2
Total Product design costs	$          42,500.00	$          42,500.00	$          85,000.00
General factory
Cost allocation rate	$             19.0152	$             19.0152
Direct labor-hours	8,100	5,100	13,200
Total General factory costs	$      154,023.12	$          96,977.52	$      251,000.64
Total Allocated Manufacturing costs	$      369,833.12	$      294,367.52	$      664,200.64

Notes:

• Activity Based Costing is a costing technique wherein overhead costs are assigned to activities based on the resource consumption by each activity to form a cost pool.
• These activity costs are then allocated to each unit of product produced based on the activity used by the product.
• Each activity will have an activity cost allocation rate.
• Activity allocation Rate = Total costs incurred for the activity ÷ Activity cost driver
• Activity cost driver is any factor that will cause a change in the activity cost.