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 Repair and maintenance on assembly machine Programming cost Software inspections Product testing Total overhead cost Cost Pool Total $ 113,900 145,600 12,000 16,000 $287,500 Cost Driver Number of units produced Number of programming hours Number of inspections Number of tests Expected activity for each product follows: Number of Units 20,100 46,900 67,000 Decoder P Decoder Q Total Number of Programming Hours 2,300 1,700 4,000 Number of Inspections 228 Number of Tests 1, 120 880 2,000 72 300 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: Decoder P Decoder Q Total Direct Labor Hours 6,900 16,100 23,000 Required a. Compute the amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base. b. Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC.

Answer 1

a) Overhead cost allocated

	Decoder P	Decoder Q
Overhead cost allocated	287500/23000*6900 = 86250	201250

b) Overhead cost per unit

When using direct labor hour

	Decoder P	Decoder Q
Overhead cost allocated	287500/23000*6900 = 86250	201250
Unit	20100	46900
Overhead cost per unit	4.29	4.29

When using ABC

	Decoder P	Decoder Q
Repairs and maintenance of assembly machine	113900/67000*20100 = 34170	79730
Programming cost	145600/4000*2300 = 83720	61880
Software inspection	12000/300*228 = 9120	2880
Product testing	16000/2000*1120 = 8960	7040
Total Overhead	135970	151530
Unit	20100	46900
Overhead cost per unit	6.76	3.23