Question

Question 2                                                                                               (Total: 30 marks)

Lojay Company produces custom covers for the air conditioning units of homes and businesses. For its overhead costs the company uses an activity-based costing system. The following data has been provided by the Lojay company regarding its annual overhead costs and its activity cost pools:

Overhead Costs:
Production overhead	$89,000
Office expenses	41,500
Total	$130,500

Distribution of Resource Consumption:

	Activity Cost Pools
	Making Covers	Job Support	Other	Total
Production overhead	33%	45%	22%	100%
Office expenses	14%	54%	32%	100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The amount of activity for the year is as follows:

Activity Cost Pool	Annual Activity
Making covers	2,500 yards
Job support	200 jobs
Other	Not applicable

Required:

1. Prepare the first-stage allocation of overhead costs to the activity cost pools
2. Compute the activity rates for the Making Covers and Job Support activity cost pools
3. Prepare a revenue report where making 50 yards of covers and DM and DL cost of $950, and revenue is $2,500

Answer 1

1) The first stage allocation of overhead is shown as follows:-    (Amounts in $)

	Activity Cost Pools
	Making Covers	Job Support	Other	Total
Production overhead	29,370 (89,000*33%)	40,050 (89,000*45%)	19,580 (89,000*22%)	89,000
Office expenses	5,810 (41,500*14%)	22,410 (41,500*54%)	13,280 (41,500*32%)	41,500
Total Allocated cost	35,180	62,460	32,860	130,500

2) Calculation of Activity Rate (Amounts in $)

Activity Cost Pool	Total Cost (A)	Annual Activity(B)	Activity Rate (A/B)
Making covers	35,180	2,500 yards	$14.072 per yard
Job support	62,460	200 jobs	$312.30 per job

3) Revenue Report for the given Job (Amounts in $)

Revenue (A)	2,500.00
Costs:
Direct Material and Direct Labor	950.00
Making Covers Cost (50 yards*$14.072)	703.60
Job Support Cost (1 job*$312.30)	312.30
Total Costs (B)	1,965.90
Net Income from Job (A-B)	534.10

The other overhead cost consists of the costs of idle capacity and organization-sustaining costs, therefore it will not be allocated to each job as considered as common fixed costs for the company. (Also no activity base is given for allocation of other overheads).