Question

Exercise 4-5 Assigning Overhead to Products in ABC [LO4-2, LO4-3]

Sultan Company uses an activity-based costing system.

At the beginning of the year, the company made the following estimates of cost and activity for its five activity cost pools:

Activity Cost Pool	Activity Measure	Expected Overhead Cost			Expected Activity
Labor-related	Direct labor-hours	$	158,800		39,700		DLHs
Purchase orders	Number of orders	$	11,605		211		orders
Parts management	Number of part types	$	90,470		109		part types
Board etching	Number of boards	$	99,000		1,980		boards
General factory	Machine-hours	$	139,300		19,900		MHs

Required:

1. Compute the activity rate for each of the activity cost pools.

2. The expected activity for the year was distributed among the company’s four products as follows:

	Expected Activity
Activity Cost Pool	Product A			Product B			Product C			Product D
Labor-related (DLHs)		6,700			23,100			4,200			5,700
Purchase orders (orders)		43			36			39			93
Parts management (part types)		24			19			50			16
Board etching (boards)		590			740			650			0
General factory (MHs)		3,700			8,200			2,900			5,100

Using the ABC data, determine the total amount of overhead cost assigned to each product.

Answer 1

1. Activity rate for each of the activity cost pools [Refer working note 1]
Activity Cost Pools	Activity Rate
Labor-related	$4	per DLH
Purchase orders	$55	per order
Parts management	$830	per part type
Board etching	$50	per board
General factory	$7	per MH

.

.

2. Total amount of overhead cost assigned to each product     [Refer working note 2]
Activity Cost Pool	Product A	Product B	Product C	Product D
Labor-related (DLHs)	$26,800	$92,400	$16,800	$22,800
Purchase orders (orders)	$2,365	$1,980	$2,145	$5,115
Parts management (part types)	$19,920	$15,770	$41,500	$13,280
Board etching (boards)	$29,500	$37,000	$32,500	$0
General factory (MHs)	$25,900	$57,400	$20,300	$35,700

.

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Working note 1 - Calculation of Activity rate
Activity Cost Pool	Expected Overhead Cost (a)	Expected Activity (b)		Activity rate (a / b)
Labor-related	$158,800	39,700	direct labor-hours	$4.00	per DLH
Purchase orders	$11,605	211	orders	$55.00	per order
Parts management	$90,470	109	part types	$830.00	per part type
Board etching	$99,000	1,980	boards	$50.00	per board
General factory	$139,300	19,900	Machine-hours	$7.00	per MH

.

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Working note 2 - Allocation of Overhead to each product using activity rates:
Activity Cost Pool	Activity Rate [Refer working note 1]		Product A			Product B			Product C			Product D
			Expected activity		Overhead assigned	Expected activity		Overhead assigned	Expected activity		Overhead assigned	Expected activity		Overhead assigned
	(a)		(b)		(a x b)	(c)		(a x c)	(d)		(a x d)	(e)		(a x e)
Labor-related	$4.00	per DLH	6,700	direct labor-hours	$26,800	23,100	direct labor-hours	$92,400	4,200	direct labor-hours	$16,800	5,700	direct labor-hours	$22,800
Purchase orders	$55.00	per order	43	orders	$2,365	36	orders	$1,980	39	orders	$2,145	93	orders	$5,115
Parts management	$830.00	per part type	24	part types	$19,920	19	part types	$15,770	50	part types	$41,500	16	part types	$13,280
Board etching	$50.00	per board	590	boards	$29,500	740	boards	$37,000	650	boards	$32,500	-	boards	$0
General factory	$7.00	per MH	3,700	Machine-hours	$25,900	8,200	Machine-hours	$57,400	2,900	Machine-hours	$20,300	5,100	Machine-hours	$35,700
Total overhead assigned					$104,485			$204,550			$113,245			$76,895