Question

Adelberg Company has two products: A and B. The annual production and sales of Product Ais 2.500 units and of Product Bis 2,000 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products Product A requires 0.3 direct labor- hours per unit and Product requires 0.6 direct labor hours per unit. The total estimated overhead for next period is $108,775. The company is considering switching to an activity based costing system for the purpose of computing unit product costs for external reports. The new activity based costing system would have three overhead activity cost pools-Activity 1. Activity 2 and Order Size--with estimated overhead costs and expected activity as follows: Expected Activity Activity Cost Pools Activity 1 Activity 2 Order Size Total Estimated Overhead Costs $ 33,611 19,144 56,020 $108,775 Product 1,900 2,600 780 Product B 1,500 1,100 1,200 Total 3,400 3,700 1,980 (Note: The Order Size activity cost pool's costs are allocated on the basis of direct labor hours.) The predetermined overhead rate (le, activity rate) for Activity 2 under the activity based costing system is closest to Multiple Choice O $7.36

Answer 1

Solution:

Activity rate for Activity 2 = estimated cost for activity 2/ total expected activity for activity 2

= $19144 / 3700 = $5.17

Hence second option is correct.