Question

Sheridan Publishing identified the following overhead activities, their respective costs, and their cost drivers to produce the three types of textbooks the company publishes Type of Textbook Activity (Cost) Machine maintenance ($300,000) Setups ($600,000) Packing ($160,000) Photo development ($644,000) Cost Driver Number of machine hours Number of setups Number of cartons Number of pictures 300 30 15 4,000 Deluxe Moderate Economy 1,200 20 50 1,000 900 25 35 2,000 Deluxe textbooks are made with the finest-quality paper, six-color printing, and many photographs. Moderate texts are made with three colors and a few photographs spread throughout each chapter. Economy books are printed in black and white and include pictures only in chapter openings Required a. Sheridan currently allocates all overhead costs based on machine hours. The company produced the following number of books during the prior year: Deluxe 50,000 Moderate 150,000 Economy 200,000 Determine the overhead cost per book for each book type b. Determine the overhead cost per book, assuming that the volume-based allocation system described in Requirement a is replaced with an activity-based costing system

Answer 1

Total overhead cost = 300,000+600,000+160,000+644,000

= $1,704,000

Total machine hours = 300+900+1200 = 2,400

Overhead cost per machine hour = 1,704,000/2,400 = $710 per hour

Allocated to per book:

Deluxe = 300*710/50,000 = $4.26

Moderate = 900*710/150,000 = $4.26

Economy = 1,200*710/200,000 = $4.26

b.ABC system:

Overhead	Cost	Driver	Rate per Activity	Deluxe	Moderate	Economy
Machine Maintenance	300,000	2,400	125	37,500	112,500	150,000
Setups	600,000	75	8,000	240,000	200,000	160,000
Packing	160,000	100	1,600	24,000	56,000	80,000
Photo Development	644,000	7,000	92	368,000	184,000	92,000
Total				669,500	552,500	482,000
Number of Books				50,000	150,000	200,000
Cost per book				13.39	3.68	2.41