Question

Austin Company manufactuerrs two products, Flacca and Gordo. Overhead costs are comprised of machine set-ups $1,600,000; machining $3,600,000; and inspecting $1,200,000. Recent data are shown below:

Flacca Gordo

Direct Labor Hours 15,000 25,000

Machine Setups 600 400

Machine Hours 24,000 26,000

Inspections 800 700

Overhead assigned to Flacca using a single overhead rate based on direct labor hours and using ABC, respectively, would be:

A. $4,000,000 and $2,400,000

B. $4,000,000 and $3,072,000

C. $2,400,000 and $3,328,000

D. $2,400,000 and $3,072,000

(Answer B is incorrect also show all steps involved in the calculation)

Answer 1

Total estimated overhead = 1600000 + 3600000 + 1200000

6400000

	Flacca	Gordo	Total
Direct labor hours	15000	25000	40000
Machine setup	600	400	1000
Machine hours	24000	26000	50000
Inspections	800	700	1500

Using single overhead rate :
Single overhead rate = Total estimated overhead / Total estimated direct labor hours = 6400000 / 40000	160
Overhead assigned to Flacca = Direct labor hours * Single overhead rate = 15000 * 160	2400000

Using ABC :
Activity	Activity rates
Machine setups ( 1600000 / 1000 )	1600
Machining ( 3600000 / 50000 )	72
Inspecting ( 1200000 / 1500 )	800
Overhead allocation	Flacca
Machine setups ( 600 * 1600 )	960000
Machining ( 24000 * 72 )	1728000
Inspecting ( 800 * 800 )	640000
Total overhead assigned	3328000

Answer : Option C [ $2,400,000 and $3,328,000 ]