Question

The Boston Company has only two product lines: computer parts and cell phones. Outside cost consultants have to recommend that the company use activity-based costing to allocate the total overhead costs to product lines.

The company expects to produce 4,000 computer parts and 2,000 cell phones in 2019. Each computer part requires 2 direct labor hours to produce and each cell phone requires 0.5 hours to produce. The direct material and direct labor costs included in the two products are as follows:

The total overhead data for 2019 are as follows:

Activity	Overhead Costs	Volume Levels
Production Setups	$80,000	25 setups
Material Handling	$70,000	5,000 lbs
Packaging and Shipping	$120,000	6,000 Boxes
Total Overhead Costs	$270,000

Based on an analysis of the three overhead activities, it is estimated that the two products would require these activities as follows in 2017:

Activity	Computer Parts	Cell Phones	Totals
Production Setups	5 setups	20 setups	25 Setups
Material Handling	1,000 lbs	4,000 lbs	5,000 lbs
Packaging and Shipping	4,000 Boxes	2,000 boxes	6,000 boxes

1. Please allocate the overhead cost to two product lines using a plant-wide rate based on direct labor hours.
2. Please allocate the total overhead costs to two product lines using an activity-based costing.

Answer 1

1. Please allocate the overhead cost to two product lines using a plant-wide rate based on direct labor hours.

	Units Expected to produce	direct labor hour per unit	direct labor hours
Computer Parts	4,000	2	8000
Cell Phones	2,000	0.5	1000
Total Estimated Direct Labor Hour			9000
Plant Wide overhead Rate =Estimated Overhead / Direct Labor Hour=$270000/9000 =$30 per Direct Labor hr
	direct labor hours	Overhead Rate Per Hr	Overhead Allocated
Computer Parts	8000	30	$              2,40,000.00
Cell Phones	1000	30	$                  30,000.00
Total			$              2,70,000.00

2 Please allocate the total overhead costs to two product lines using an activity-based costing.

Activity	Overhead Costs	Volume Levels	Activities Rate
Production Setups	80,000	25	$                       3,200.00
Material Handling	70,000	5000	$                            14.00
Packaging and Shipping	1,20,000	6000	$                            20.00
Total Overhead Costs	2,70,000

	Computer Parts
	Volume Levels	Rate
Production Setups	5	$ 3,200.00	$     16,000.00
Material Handling	1000	$       14.00	$     14,000.00
Packaging and Shipping	4000	$       20.00	$     80,000.00
Overhead Cost Allocated			$ 1,10,000.00
Cell Phones
	Volume Levels	Rate
Production Setups	20	$ 3,200.00	$     64,000.00
Material Handling	4000	$       14.00	$     56,000.00
Packaging and Shipping	2000	$       20.00	$     40,000.00
Overhead Cost Allocated			$ 1,60,000.00