Question

Assignment (2): CH 7: ABC Leader Corporation manufactures two products: Product 095C and Product M31N. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products 095C and M31N. Activity Cost PoolActivity MeasureTotal Cost Total Activity Machine-hours Machine setups Number of setups S140,000 350setups Number of productsS 98,000 Direct labor-hoursS 340,000 10,000 DLHS S207,000 9,000MHS Machining 2products Product design Order size Activity Measure Product O95OProduct M31N Machine-hours Number of setups Number of products Direct labor-hours 3,000 6,000 190 160 1 1 4,000 6,000 Required: 1. Compute the plantwide (POHR) overhead rate. 2. Using the plantwide overhead rate, how much manufacturing overhead cost would be allocated to Product O95C? 3. Using the ABC system, compute the activity rate for each activity cost pool. 4. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product 095C?

Answer 1

Solution 1: Calculation of plantwide overhead rate
Manufacturing overhead
Machining cost	$      207,000
Set up cost	$      140,000
Product design	$         98,000
Order size	$      340,000
Total Manufacturing overhead	$      785,000
Total direct labor hours	10,000
Overhead absorption rate	=Total manufacturing overhead/Total labor hour
	=785000/10,000
Overhead absorption rate per labor hour	$           78.50
Solution 2: Calculation of overhead applied to O95C
Direct labor hours used in O95C	4,000
Overhead applied in O95C=	=Labour hours * Overhead absorption rate
Overhead applied in O95C=	=4,000*78.50
Overhead applied in O95C=	$      314,000
Solution 3: Activity-based costing rates
Manufacturing overhead	Cost	Cost driver	Driver total	Absorption rate=Cost/Driver
Machining cost	$      207,000	Machine-hours	9,000	$                                            23
Set up cost	$      140,000	Number of setups	350	$                                          400
Product design	$         98,000	Number of products	2	$                                    49,000
Order size	$      340,000	Direct labor hours	10,000	$                                            34
Total Manufacturing overhead	$      785,000
Solution 4: Overheads applied to O95C based on activity-based costing rates
Allocated overheads allocation=Actual units*absorption rate
Description	Activity total	Activity rate	Cost
	A	B	C=A*B
Machining cost	6,000	$                             23	$      138,000
Set up cost	190	$                          400	$         76,000
Product design	1	$                     49,000	$         49,000
Order size	4,000	$                             34	$      136,000
Total			$      399,000