Rocket Products manufactures three types of remote control devices: Economy Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost and related cost driver is identified below.
| Activity | Cost | Cost Driver |
| Material handling | $ 225,000 | Number of parts |
| Material insertion | 2,475,000 | Number of parts |
| Automated machinery | 840,000 | Machine hours |
| Finishing | 170,000 | Direct labor hours |
| Packaging | 170,000 | Orders shipped |
| Total | $3,880,000 |
The following information pertains to the three product lines for next year:
| Units to be produced | Economy | Standard | Deluxe |
|---|---|---|---|
| Orders to be shipped | 10,000 | 5,000 | 2,000 |
| Number of parte per unit | 1,000 | 500 | 200 |
| Machine hours per unit | 1 | 3 | 5 |
| Labor hours per unit | 2 | 2 | 2 |
Assume that Rocket is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:
Answer: $456,471 -->Refer working note 1
.
| Working note 1 - Calculation of the amount of overhead cost allocated to the Deluxe product line | |
| Deluxe | |
| Number of units produced (a) | 2000 |
| Number of direct labor hours per unit (b) | 2 |
| Total number of labor hours (c = a x b) | 4000 |
| Predetermined overhead rate [Refer working note 2] (d) | $114.117647058824 |
| Overhead assigned (c x d) | $456,470.588235294 |
.
.
| Working note 2 - Calculation of predetermined overhead rate | |
| Total estimated overhead costs (a) | $3,880,000 |
| Total estimated number of direct labor hours [Refer working note 3] (b) | 34000 |
| Overhead rate (a / b) | $114.117647058824 |
.
.
| Working note 3 - Calculation of total estimated number of direct labor hours | |
| Direct labor hours estimated for Economy [Units to be produced x Labor hour per unit = 10,000 x 2] (a) | 20000 |
| Direct labor hours estimated for Standard [Units to be produced x Labor hour per unit = 5,000 x 2] (b) | 10000 |
| Direct labor hours estimated for Deluxe [Units to be produced x Labor hour per unit = 2,000 x 2] (c) | 4000 |
| Total number of labor hours (a + b + c) | 34000 |