Question

Markham Company makes two products: Basic Product and Deluxe Product. Annual production and sales are 1,400 units of Basic Product and 1,000 units of Deluxe Product. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product requires 0.4 direct labor hours per unit and Deluxe Product requires 0.8 direct labor hours per unit. The total estimated overhead for next period is $99,485.

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 General Factory—with estimated overhead costs and expected activity as follows:

	Estimated				Expected Activity
Activity Cost Pool	Overhead Costs				Basic Product		Deluxe Product		Total
Activity 1	$	30,696			1,100		900		2,000
Activity 2		17,595			1,700		500		2,200
General Factory		51,194			560		800		1,360
Total	$	99,485

(Note: The General Factory 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:

Multiple Choice

• $12.57.

• $8.00.

• $45.22.

• $73.15.

Answer 1

Answer

• Overhead rate for Activity 2 under Activity based costing
  = $ 17595 estimated overhead cost for Activity 2 / 2200 total expected activity
  = 17595 / 2200
  = $ 7.9977
  = $ 8.00
• Correct Answer = Option #2: $ 8.00