Question

Exercise 5-6A Computing overhead rates based on different cost drivers LO 5-2,5-3 Munoz Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows: Activity Pools Repair and maintenance on assembly machine Programming cost Software inspections Product testing Total overhead cost Cost Pool Total $ 74,100 84,240 7,000 10,540 $175,880 Cost Driver Number of units produced Number of programming hours Number of inspections Number of tests Expected activity for each product follows: Number of Units 18,000 39,000 57,000 Decoder P Decoder o Total Number of Programming Hours 2,200 1,400 3,600 Number of Inspections 186 Number of Tests 1,200 2,200 3,400 94 280 Required a. Compute the overhead rate for each activity pool. b. Determine the overhead cost allocated to each product.

Answer 1

a) Activity Cost Pool Cost Driver Volume R&M on assembly machine Programming cost Software inspection Product testing Allocation Rate $1.30 ($74100 / 57000 units] $23.40 ($84240 / 3600 prog. hours] $25.00 ($7000 / 280 inspections] $3.10 ($10540 / 3400 tests] # of units # of prog. hours # of inspections # of line tests Activity Cost $74,100 $84,240 $7,000 $10,540 57,000 units 3,600 prog. hours 280 inspections 3,400 tests b) Allocation Activity Activity costs assigned to Decoder P: Rate Usage R&M on assembly machine $1.30 Programming cost $23.40 2,200 Software inspection $25.00 186 Product testing $3.10 1,200 Activity costs assigned to Decoder P: Activity Cost $23,400 ($1.3 x 18000] $51,480 ($23.4 x 2200] $4,650 [$25 x 186] $3,720 [$3.1 x 1200] $83,250 Allocation Activity Activity costs assigned to Decoder Q: Rate Usage R&M on assembly machine $1.30 39,000 Programming cost $23.40 1,400 Software inspection $25.00 94 Product testing $3.10 2,200 Activity costs assigned to Decoder Q: Activity Cost $50,700 ($1.3 x 39000] $32,760 ($23.4 x 1400] $2,350 ($25 x 94] $6,820 [$3.1 x 2200] $92,630