Question

Howell Corporation's activity-based costing system has three activity cost pools-Machining, Setting Up, and Other. The company's overhead costs, which consist of equipment depreciation and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Equipment depreciation (total) Indirect labor (total) $32,300 $7,250 Distribution of Resource Consumption Across Activity Cost Pools Machining Setting Up Other Equipment depreciation Indirect labor 0.50 0.30 0.20 0.40 0.30 0.30 Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Batches MHs Product S4 12, 800 5,500 18,300 1,100 2,100 Product CO 3,200 Total Additional data concerning the company's products appears below Product $4 Product co $85,000 $30,200 Sales (total) Direct materials (total) Direct labor (total) $ 75,900 $ 26,600 $35,200 33,400

Answer 1

Answer -

a.

Assign overhead costs to activity cost pools using activity-based costing

	Activity Cost Pool			Total
	Machining	Setting Up	Other
Equipment depreciation	$16150	$9690	$6460	$32300
Indirect labor	$2175	$2175	$2900	$7250
Total	$18325	$11865	$9360	$39550

Calculations :

1. Equipment depreciation

Machining = $32300 * 0.50 = $16150

Setting Up = $32300 * 0.30 = $9690

Other = $32300 * 0.20 = $6460

2. Indirect labor

Machining = $7250 * 0.30 = $2175

Setting Up = $7250 * 0.30 = $2175

Other = $7250 * 0.40 = $2900

b.

The activity rates for each activity cost pool are computed as follows :

	Total cost (A)	Total activity (B)	Activity rate (A) / (B)
Machining	$18325	18300	$1.00 per MH
Setting Up	$11865	3200	$3.71 per batch

c.

The overhead cost charged to Product S4 is :

	Activity rate (A)	Activity (B)	ABC cost (A) * (B)
Machining	$1.0013 per MH	12800	$12816.64
Setting Up	$3.7078 Per batch	1100	$4078.58
Total overhead cost			$16895.22

The overhead cost charged to Product C0 is :

	Activity rate (A)	Activity (B)	ABC cost (A) * (B)
Machining	$1.0013 per MH	5500	$5507.15
Setting Up	$3.7078 Per batch	2100	$7786.38
Total overhead cost			$13293.53

d.

The product margins for each product using activity-based costing.

	Product S4		Product C0
Sales		$85000		$75900
Direct materials	$30200		$26600
Direct labor	$35200		$33400
Machining	$12816.64		$5507.15
Setting up	$4078.58		$7786.38
Product margin		$2704.78		$2606.47