Question

Adelberg Company has two products: A and B. The annual production and sales of Product A is 2,200 units and of Product B is 1,600 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.7 direct labor-hours per unit. The total estimated overhead for next period is $104,375.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and Order Size--with estimated overhead costs and expected activity as follows:

	Estimated		Expected Activity
Activity Cost Pools	Overhead Costs		Product A	Product B	Total
Activity 1	$	32,252	1,500	1,100	2,600
Activity 2		18,370	2,200	700	2,900
Order Size		53,753	880	1,120	2,000
Total	$	104,375

Note: The Order Size activity cost pool's costs are allocated on the basis of direct labor-hours.)

The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to:

• $8.35

• $6.33

• $46.34

• $35.99

Answer 1

Predetermined overhead rate for activity 2 under the activity based costing = Estimated overhead cost / Expected activity

= 18,370/2,900

= $6.33

2nd option is correct option.

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