Question

Problem #2 (30 points) XYZ Corporation has an activity-based costing system with three activity cost pools: Machining, Set-Up and Other. The company's overhead costs have already been allocated to the cost pools and total $25,200 for the Machining cost pool, $17,200 for the Set-Up cost pool and $41,600 for the Other cost pool. Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Set-Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products and the company's costs appear below: MHS Batches Product R8 6,600 200 Product N8 3,400 800 Total 10,000 1,000 Sales (total) Direct materials (total) Direct labor (total) Product R8 Product N8 $ 252,600 $ 172,800 $ 125,100 $ 96,900 $ 95,200 $ 48,100 REQUIRED A. Calculate activity rates for each cost pool. B. Determine the amount of overhead cost that would be assigned to each product. C. Determine the product margins for each product. D. Why have many organizations adopted activity-based costing systems?

Answer 1

Statement showing computations
Particulars	Amount a	Activity Driver	No of Activity b	Cost per activity c= a/b	No of Activity of R 8 d	Cost Allocated to R8 c*d	No of Activity of N8 e	Cost Allocated to N8 c*e
Machining	25,200.00	Machine hours	10,000.00	2.52	6,600.00	16,632.00	3,400.00	8,568.00
setup	17,200.00	Batches	1,000.00	17.20	200.00	3,440.00	800.00	13,760.00
Other						-		-
Total Overhead assigned to each product	42,400.00					20,072.00		22,328.00
	R8	N8
Sales	252,600.00	172,800.00
Less Total costs
Direct materials	125,100.00	96,900.00
Direct Labour	95,200.00	48,100.00
Overhead assigned	20,072.00	22,328.00
Total costs	240,372.00	167,328.00
Product margin	12,228.00	5,472.00
Advantages of ABC over traditional Costing
a) Greater costing accuracy
b) The use of an activity based costing system can also help a company to develop a way to analyze and justify manufacturing cycle-time improvements.
c) Elimination of allocating irrelevant costs to a product
d) Easy interpretation of cost for internal management
e) Greater understanding of costs