Question

Sheridan Publishing identified the following overhead activities, their respective costs, and their cost drivers to produce the three types of textbooks the company publishes.

		Type of Textbook
Activity (Cost)	Cost Driver	Deluxe			Moderate			Economy
Machine maintenance ($360,000)	Number of machine hours	300			900			1,200
Setups ($620,000)	Number of setups	35			10			5
Packing ($164,000)	Number of cartons	10			40			50
Photo development ($560,000)	Number of pictures	4,000			2,000			1,000

Deluxe textbooks are made with the finest-quality paper, six-color printing, and many photographs. Moderate texts are made with three colors and a few photographs spread throughout each chapter. Economy books are printed in black and white and include pictures only in chapter openings.

Required

1. Sheridan currently allocates all overhead costs based on machine hours. The company produced the following number of books during the prior year:

Deluxe	Moderate	Economy
60,000	180,000	240,000

Determine the overhead cost per book for each book type.

2. Determine the overhead cost per book, assuming that the volume-based allocation system described in Requirement a is replaced with an activity-based costing system.

Answer 1

		Deluxe	Moderate	Economy
(a)	Cost per book (Volume - Based allocation)	$                      3.55	$          3.55	$            3.55
(b)	Cost per book (Activity - Based Costing)	$                   13.59	$          2.69	$            1.68
	Workings:
	Volume - Based allocation:
	Predetermined overhead rate	=	($360000 + $620000 + $164000 + $560000)/2400 machine hours
		=	$           710
		Deluxe	Moderate	Economy	Total
(i)	Number of machine hours	300	900	1200	2400
(ii)	Predetermined overhead rate	$                       710	$           710	$             710
(iii) = (i) * (ii)	Total Cost	$             2,13,000	$ 6,39,000	$   8,52,000	1704000
	Number of books	60000	180000	240000	480000
	Cost per book	$                      3.55	$          3.55	$            3.55
	Activity - Based Costing:
		Machine maintenance		Setups		Packing		Photo development		Total cost	Number of books	Cost per book
		Cost Driver	Cost	Cost Driver	Cost	Cost Driver	Cost	Cost Driver	Cost
		(i)	($360000/2400)*(i)	(ii)	($620000/50)*(ii)	(iii)	($164000/100)*(iii)	(iv)	($560000/7000)*(iv)	(v)	(vi)	(v) / (vi)
	Deluxe	300	$     45,000	35	$ 4,34,000	10	$     16,400	4000	$ 3,20,000	$      8,15,400	60000	$    13.59
	Moderate	900	$ 1,35,000	10	$ 1,24,000	40	$     65,600	2000	$ 1,60,000	$      4,84,600	180000	$       2.69
	Economy	1200	$ 1,80,000	5	$      62,000	50	$     82,000	1000	$      80,000	$      4,04,000	240000	$       1.68
	Total	2400	$ 3,60,000	50	$ 6,20,000	100	$ 1,64,000	7000	$ 5,60,000	$   17,04,000	480000