Question

Snowden Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows:

Activity Pools	Cost Pool Total			Cost Driver
Repair and maintenance on assembly machine	$	104,000		Number of units produced
Programming cost		168,000		Number of programming hours
Software inspections		12,000		Number of inspections
Product testing		16,000		Number of tests
Total overhead cost	$	300,000

Expected activity for each product follows:

	Number of Units			Number of Programming Hours			Number of Inspections			Number of Tests
Decoder P		16,000			2,000			190			1,400
Decoder Q		36,000			1,500			60			1,100
Total		52,000			3,500			250			2,500

Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow:

	Direct Labor Hours
Decoder P		8,000
Decoder Q		16,000
Total		24,000

Required

1. Compute the amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base.

	Allocated Cost Decoder P Decoder Q Total

1. Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC.

Cost per unit
Method	Decoder P	Decoder Q
ABC
Labor hours

Answer 1

Answers

• Requirement A

	Allocated Cost
Decoder P	$100,000	($300000/24000) x 8000 DLHs
Decoder Q	$200,000	($300000/24000) x 16000 DLHs
Total	$300,000

• Cost per unit

Cost per unit
Method	Decoder P	Decoder Q
ABC	$                        9.13	$                    4.28
Labor hours	$                 6.25	$                    5.56

--Working for ABC

Activity Pools	Cost Pool Total	Cost Driver	Total Cost driver	Allocation Rate
Repair and maintenance on assembly machine	$104,000	Number of units produced	52000	$                                 2.00
Programming cost	$168,000	Number of programming hours	3500	$                               48.00
Software inspections	$12,000	Number of inspections	250	$                               48.00
Product testing	$16,000	Number of tests	2500	$                                 6.40
Total overhead cost	$300,000

		Decoder P		Decoder Q
Activity Pools	Allocation Rate	No. of cost driver	Overhead allocated	No. of cost driver	Overhead allocated
Repair and maintenance on assembly machine	$                         2.00	16000	$                        32,000.00	36000	$      72,000.00
Programming cost	$                       48.00	2000	$                        96,000.00	1500	$      72,000.00
Software inspections	$                       48.00	190	$                          9,120.00	60	$        2,880.00
Product testing	$                         6.40	1400	$                          8,960.00	1100	$        7,040.00
		Total Allocated Cost	$                      146,080.00	Total Allocated Cost	$   153,920.00

	Allocated Cost
Decoder P	$146,080
Decoder Q	$153,920
Total	$300,000