Question

Assignment (2): CH 7: ABC Leader Corporation manufactures two products: Product 095C and Product M3IN. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products 095C and M31N. Activity Cost Pool Machining Machine setups Product design Order size Activity Measure Machine-hours Number of setups Number of products Direct labor-hours Total Cost $ 207,000 $ 140,000 $ 98,000 $ 340,000 Total Activity 9,000 MHS 350 setups 2 products 10,000 DLHS Activity Measure Machine-hours Number of setups Number of products Direct labor-hours Product 0950 6,000 190 Product M31N 3,000 160 4,000 6,000 Required: 1. Compute the plantwide (POHR) overhead rate. 2. Using the plantwide overhead rate, how much manufacturing overhead cost would be allocated to Product 095C? 3. Using the ABC system, compute the activity rate for each activity cost pool. 4. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product 095C?

Answer 1

A plant-wide overhead rate is a single rate used to assign or allocate all of a company's manufacturing overhead costs to its production output. (Manufacturing overhead costs are the indirect costs of production such as repairs, maintenance, depreciation, electricity, supervision, etc.) Often the plant-wide rate is an amount per machine hour, an amount per labor hour, or a percentage of a product's direct costs.

Calculation of Plant-wide overhead Rate by using the following formula given below

Totaloverheadscost/labourhrs

1.Computation of Plant-wide overhead Rate

Particulars	Amount ($)
Machine Cost	207000
Setup cost	140000
Product design cost	98000
order cost	340000
Total overheads cost	785000

Hence Plant-wide overhead Rate is 785000/10000 =$78.5 Per H

2.Calculation of total overhead cost allocated to product O95c by using POHR using following formula

Total labour Hrs used for product O95C*Plant-wide overhead rate

6000*78.5 =$471000

Hence Total menufacturing overheads allocated to product O95C by using POHR is $471000

(3) Calculation of Activity rate for each activity By using activity costing systems

Formula: Activity cost/number of activities

Activity Cost pool	Activity Measures	Total cost	Activity Rate($)
Machine Cost	9000 M.Hrs	207000	23
Setup cost	350 Set ups	140000	400
Product design cost	2 Products	98000	49000
order cost	10000 L.Hrs	340000	34

(4.) Calculation of total manufacturing overheads allocated to product O95c by using ABC.by using following formula.

Activity Measures for product O95C*Activity Rate

Activity Cost pool	Activity Measures	Activity Rate	Allocated cost($)
Machining	6000 M.Hrs	23	138000
Set up	190 set ups	4	760
Product design	1 Products	49000	49000
Order	4000 L.Hrs	34	136000
Total overheads			323760

Hence Total manufacturing overheads Allocated to Product O95C By Applying ABC System is $323760