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 Equipment depreciation ceciation 0.50 0.30 0.30 Indirect labor other 0.30 0.20 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. Product 54 Product co 12.800 5,500 18,300 Batches 1.100 2.100 3.200 Total Additional data concerning the company's products appears below: Products Sales (total) Direet materials total) Direct labor (total) Product co $15.900 $26.500 530.200

Answer 1

a. Assignment of overhead costs to activity cost pools using activity based costing:

	Machining	Setting Up	Others	Total
Equipment depreciation	16150 [32300*0.5]	9690 [32300*0.3]	6460 [32300*0.2]	32300
Indirect labour	2175 [7250*0.3]	2175 [7250*0.3]	2900 [7250*0.4]	7250
Total	18325	11865	9360	39550

b. Activity rates for each activity cost pool:

(i) Activity rates for machining cost pool = Total overheads cost allocated to machining activity as calculated in (a) above / Total Machine hours

= $\dpi{80} \frac{18325}{18300}$

= ~ $1 per machine hour

Therefore activity rate for machining cost pool is $1 per machine hour.

(ii) Activity rates for setting up cost pool = Total overheads cost allocated to setting up activity as calculated in (a) above / Total number of batches

= $\dpi{80} \frac{11865}{3200}$

= $3.71 per batch

Therefore the activity rate for setting up cost pool is $3.71 per batch

c. Overheads cost assigned to each product:

(i) Overheads costs assigned to product S4:

Machining overheads [$1 * 12800 MHs] = $12800

Setting up overheads [$3.71 * 1100 batches] = $ 4081

Therefore total overheads assigned to product S4 = 12800+4081 = $16881

(ii) Overheads costs assigned to product C0:

Machining overheads [$1 * 5500 MHs] = $5500

Setting up overheads [$3.71 * 2100 batches] = $ 7791

Therefore total overheads assigned to product C0 = 5500+7791 = $13291

d. Product margins for each product based on Activity based costing:

Product Margins = Sales - Direct Materials - Direct Labour - Allocated overheads

Product S4 = 85000 - 30200 - 35200 - 16881 = $2719

Product C0 = 75900 - 26600 - 33400 - 13291 = $2609

Therefore, product margin for product S4 is $2719 and that for product C0 is $2609