Question

Finch Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow: Activities Unit Level Batch Level Product Level Facility Level Cost $ 25, 200 $21,090 $13,000 $190,000 Cost driver 1,200 labor hrs. 37 setups Percentage of use 10,000 units Production of 860 sets of cutting shears, one of the company's 20 products, took 200 labor hours and 9 setups and consumed 13 percent of the product-sustaining activities. Required a. Had the company used labor hours as a companywide allocation base, how much overhead would it have allocated to the cutting shears? b. How much overhead is allocated to the cutting shears using activity-based costing? C. Compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 860 units are produced. If direct product costs are $130 and the product is priced at 35 percent above cost for what price would the product sell under each allocation system?

Answer 1

Single rate using labor hours = Estimated overheads/Estimated labor hours

= (25200+21090+13000+190,000)/1200

= $207.74 per hour

a.Allocated to Cutting Shears = Labor Hours used*rate

= 200*207.74

= $41,548

b.Allocated using ABC =

Activity	Total cost	Cost allocated	Amount
Unit Level	25200	=25200*200/1200	4200
Batch level	21090	=21090*9/37	5130
Product level	13000	=13000*13%	1690
Facility Level	190000	=190,000*860/10000	16340
		Total overheads	27360
	ABC	Labor hours
Overhead cost per unit	48.31162791	31.81395349
	ABC	Labor hours
Direct product costs	130	130
Overheads	48.31162791	31.81395349
Total cost	178.3116279	161.8139535
Selling price	240.7206977	218.4488372