Question

Columbia Corporation manufactures two products: Tricycles and Wagons. The annual production budget expects total direct labor costs to equal $167,000. The company expects to spend $60 in direct labor per tricyle for 1,950 tricycles and $20 in direct labor per wago for 2,200 wagons. The company is looking at the possibility of changing to an activity-based costing system for its products. If they company used an activity based costing system, it would have the following two activity cost pools:

		Expected Activity	per unit
Activity cost pool	Total Estimated OH Cost	Tricyle	Wagon
Set up costs	$6,900	4 setups	2 setups
Assembly costs	$31,615	2.5 hrs	.5 hrs
Total	$38,515

a. Calculate a single plant-wide predetermined OH rate based using direct labor dollars as the cost driver (round to two decimal places).

b. How much MOH will be applied to one tricycle using the plant-wide rate?

c. How much MOH will be applied to one wagon using the plant-wide rate?

d. Using the table above, calculate the activity-based OH rates for the two cost posts (round to two decimal places).

e. How much MOH will be applied to tricyles using the ABC rates?

f. How much MOH will be applied to wagons using the ABC rates?

Answer 1

solution a:

Single plant-wide predetermined OH rate based using direct labor dollars as the cost driver = Estimated overhead / Estimated direct labor dollar

= $38,515 / $167,000 = $0.23 per direct labor dollar

Solution b:

MOH will be applied to one tricycle using the plant-wide rate = $60 * 0.23 = $13.80

Solution c:

MOH will be applied to one wagon using the plant-wide rate = $20 * 0.23 = $4.60

Solution d, e and f:

Computation of activity rate and Allocation of overhead to Products - ABC - Columbia Corporation
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Tricyle		Wagon
					Usage	Allocated Costs	Usage	Allocated Costs
Setup costs	$6,900.00	Nos of setups	12200	$0.57	7800	$4,446	4400	$2,508
Assembly costs	$31,615.00	Hours	5975	$5.29	4875	$25,789	1100	$5,819
Total	$38,515.00					$30,235		$8,327