Question

Smith has allocated additional overhead to product X of $39,760 after switching to ABC. Previously overhead was allocated using only direct labor hours of which product X uses 39%. Under ABC, overhead is now allocated using both direct labor hours and machine hours. Overhead costs allocated to the machine pool = $142,000. What is product X's machine usage percentage?

Answer 1

Definition of ABC costing

It is named as activity based costing, which allocates overhead and indirect costs to the product and services.

ABC costing method recognises the relation among costs,overhead activities and products, and allocates indirect cost.
ABC costing method is used in manufacturing industries as it increases the reliability in Cost distribution incured in production process.
It is used to get better knowledge of costs, helps companies to form a more appropriate price strategies.
  

calculation of product x's machine usage

Formula:
Additional overhead of product divided by total machine usage cost into 100

= ($39760/142000) * 100= 28%

Now, we have taken additional overhead as "usage of machine cost" by product x because direct labour cost is already been added in cost of product X.

Therefore after switching to abc costing method, the (direct labour hour and machine) both has been calculated for product X.

So, the percentage of machine usage by product is 28%.