Question

Prescott makes handheld calculators in two models-basic and professional. Prescott estimated $937,500 of manufacturing overhead and 625,000 machine hours for the year. The basic model actually consumed 240,000 machine hours, and the professional model consumed 385,000 machine hours. The predetermined overhead allocation rate using machine hours as the allocation base is $1.50 per machine hour, with the allocated overhead costs split between the basic model and the professional model by $360,000 and $577,500, respectively. (Click the icon to view the data using multiple department allocation rates.) (Click the icon to view additional data.)

Answer 1

1.

	Estimated overhead costs	Estimated qty of the allocation base	Predetermined OH allocation rate
Materials handling	88000	88	1000
Machine setup	365500	60	6091.67
Inspection of parts	484000	88	5500

Predetermined OH allocation rate

X

Expected usage

Allocated mfg overhead costs

	Basic Model	Professional Model
Manufacturing overhead - Materials handling	32000	56000
Manufacturing overhead - Machine setup	109650	255850
Manufacturing overhead - Inspection of parts	176000	308000
Total manufacturing overhead cost	317650	619850

2.

	Basic Model		Professional model
	Total MOH	Per unit [ Total MOH/20000]	Total MOH	Per unit
Single plantwide allocation rate	360000	18	577500	28.88
Multiple department allocation rates	458750	22.94	478750	23.94
Activity based allocation rates	317650	15.88	619850	30.99

The allocation using activity based allocation rates is the most accurate becuase it considers the resources used by each model. Management can now see that the basic model cost less than expected and professional model cost more than expected to produce.