Question

St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.

Product	Pool No.1 (Driver: DLH)				Pool No. 2 (Driver: SU)				Pool No. 3 (Driver: PC)
Beta		1,200				45				2,250
Zeta		2,800				55				750
Pool Cost	$	160,000			$	280,000			$	360,000

The overhead cost allocated to Zeta by using activity-based costing procedures would be:

Multiple Choice

• $240,000.

• $356,000.

• $444,000.

• $560,000.

• None of the answers is correct.

Answer 1

Activity Rate
Activity	Total Overheads	Estimated Activity Level		Rate Per Activity
Pool No 1	$             1,60,000	4000		$                40.00
Pool No 2	$             2,80,000	100		$          2,800.00
Pool No 3	$             3,60,000	3000		$              120.00

Allocation of overhead to Zeta
Activity	Rate Per Activity		Activity Level	Total Overhead
a	b		c	d=b*c
Pool No 1	$                40.00		2,800	$           1,12,000.00
Pool No 2	$          2,800.00		55	$           1,54,000.00
Pool No 3	$              120.00		750	$               90,000.00
Total				$           3,56,000

Answer 2

Total Pool Cost = Sum of No. 1, 2, and 3 = $160,000 + $280,000 + $360,000 = $800,000
Overhead allocated to Beta = (Beta DLH ÷ Total DLH) × Total Pool Cost
= (1,200 ÷ 4,000) × $800,000
= $240,000(Answer)