Question

Required information The Foundational 15 [LO7-1, LO7-3, L07-4] [The following information applies to the questions displayed below.] Hickory Company manufactures two products—15,000 units of Product Y and 7,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $765,000 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z: Activity Cost Pool Machining Machine setups Product design General factory Activity Measure Machine-hours Number of setups Number of products Direct labor-hours Estimated Overhead Cost $ 231,000 $ 180,000 $ 94,000 $ 260,000 Expected Activity 11,000 MHS 300 setups 2 products 13,200 DLHS Activity Measure Machine-hours Number of setups Number of products Direct labor-hours Product Y Product Z 8,000 3,000 60 240 1 1 7,000 6,200

Answer 1

Solution

Hickory Company

1. Determination of plantwide overhead rate and the percentage of overhead cost allocated to Product X and Product Y:

Plant-wide overhead rate = (total estimated overhead cost)/total direct labor hours

Total direct labor hours = 13,200 (7,000 + 6,200)

Total manufacturing overhead = $765,000

Plant-wide overhead rate = $765,000/13,200 hours = $57.95 per direct labor hour

2. Allocation to Products –

                                                Product X        Product Y

Manufacturing overhead        $405,650         $359,350

Computations –

X - $57.95 x 7,000 = $405,650

Y - $57.95 x 6,200 = $359,350

3. Activity rate for the machining activity cost pool:

Activity rate for Machining = estimated overhead cost/machine hours

Estimated overhead cost = $231,000

Machine hours = 11,000

Activity rate = 231,000/11,000 = $21 per Machine hour

4. Activity rate for the machine setups activity cost pool:

Activity rate for machine setups = estimated overhead cost/number of setups

Estimated overhead cost = $180,000

Number of machine setups = 300

Activity rate for machine setup = $180,000/300 = $600 per setup

5. Activity rate for the product design activity cost pool:

Activity rate for product design = estimated overhead cost/number of products

Estimated overhead cost = $94,000

Number of products = 2

Activity rate per product = 94,000/2 = $47,000 per product