Question

Multiple Versus Single Overhead Rates, Activity Drivers

Deoro Company has identified the following overhead activities, costs, and activity drivers for the coming year:

Activity	Expected Cost	Activity Driver	Activity Capacity
Setting up equipment	$468,460	Number of setups	590
Ordering costs	333,000	Number of orders	18,500
Machine costs	908,600	Machine hours	41,300
Receiving	336,000	Receiving hours	9,600

Deoro produces two models of dishwashers with the following expected prime costs and activity demands:

	Model A	Model B
Direct materials	$577,000	$835,000
Direct labor	$479,000	$480,000
Units completed	15,600	8,800
Direct labor hours	5,200	2,400
Number of setups	350	240
Number of orders	6,100	12,400
Machine hours	23,200	18,100
Receiving hours	3,600	6,000

1. Determine the unit cost for each model using direct labor hours to apply averhead. Round intermediate calculations and final answers to nearest cent.

Unit Cost

Model A ?

Model B ?

2. Determine the unit cost for each model using the four activity drivers. Round your answers to nearest cent.

Unit Cost

Model A ?

Model B ?

3. Which method produces the more accurate cost assignment?

Answer 1

Required 1 :
Total estimated overhead cost = 468460 + 333000 + 908600 + 336000 =	2046060
Predetermined overhead rate = Total estimated overhead cost / Total estimated direct labor hours = 2046060 / (5200+2400) =	269.22

	Model A	Model B
Direct materials	577000	835000
Direct labor	479000	480000
Overhead applied [ Predetermined overhead rate * Direct labor hours ]	1399944	646128
Total cost	2455944	1961128
(/) Units completed	15600	8800
Unit cost	157.43	222.86

Required 2 :
Activity	Expected cost	Expected activity	Activity rate
Setting up equipment	468460	590	794
ordering cost	333000	18500	18
Machine costs	908600	41300	22
Receiving	336000	9600	35

	Model A	Model B
Direct materials	577000	835000
Direct labor	479000	480000
Overhead applied [ Activity rate * Activity ]
Setting up equipment	277900	190560
Ordering cost	109800	223200
Machine costs	510400	398200
Receiving	126000	210000
Total cost	2080100	2336960
(/) Units completed	15600	8800
Unit cost	133.34	265.56

3.

Which method produces the most accurate cost assigment?

Answer : Four activity drivers

Reason : As in four activity drivers the overhead amount is allocated in a better way as per the use of activity