Question

Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data:

					Cost Driver Volume
Activity	Cost Driver	Cost			Pencils	Pens
Setting up	Number of setups	$	96,900		21	30
Inspecting	Number of parts		33,000		4	7
Packing and shipping	Number of boxes shipped		66,000		40,000	70,000
Total overhead		$	195,900

Required:

a. Compute the amount of overhead to be allocated to each product under activity-based costing.

b. Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.2 for pencils and 0.1 for pens and that 40,000 boxes of pencils and 70,000 boxes of pens were produced during the period.

Answer 1

a) Overhead allocated under ABC

	Pencils	Pens
Setting up	39900	96900/51*30 = 57000
Inspecting	33000/11*4 = 12000	21000
Packing and shipping	24000	42000
Total	75900	120000

b) Overhead rate = 195900/15000 = 13.06 per hour

	Pencils	Pens
Overhead allocated	8000*13.06 = 104480	91420