Question

Poldberg Co. uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages & Salaries Factory Supplies Total $806,000 488,000 $1,294,000 Distribution of resource consumption: Clean-Up Other Total Activity Cost Pools Wages and salaries Factory Supplies Inspection 60% 22% 18% 100% 48% 20% 32% 100% The amount of activity for the year is as follows: Activity Cost Pool Clean-Up Inspection Activity 1,000 Batches 400 Inspections a. How much OVERHEAD cost would be allocated to a "Customer A,” who initiated 125 batches and 55 inspections in a year?

Answer 1

Part a:

Total overhead cost assigned to customer A

Activity	Activity Rate	x	Activity Driver	=	Overhead cost
Clean-up	$411.56 per batch	x	125 batches	=	$51,445.00
Inspection	$1,453.00 per inspection	x	55 inspections	=	$79,915.00
Total Overhead cost assigned					$131,360.00

Working Notes:

Allocation of overhead cost to an activity

Activity cost pool	Clean-up	Inspection	Other	Total
Wages and Salaries	$177,320	$483,600	$145,080	$806,000
Factory Supplies	$234,240	$97,600	$156,160	$488,000
Total	$411,560	$581,200	$301,240	$1,294,000

Activity rate

Activity Cost pools	Total Cost	/	Total Activity	=	Activity Rate
Clean-up	$411,560	/	1,000 batches	=	$411.56 per batch
Inspection	$581,200	/	400 inspections	=	$1,453.00 per inspection

Part b:

Customer Margin Report using Activity Based Costing

Particulars	$
Sales	580,000
Less: Costs
Direct Material cost	230,000
Direct Labor cost	150,000
Selling cost	80,000
ABC Cost
Clean-up cost	51,445
Inspection cost	79,915
Customer Margin Report	(11,360)

Part c:

1. Total Overhead assigned to the Inspection cost pools = $581,200

2. Allocation rate for the clean-up cost pool = $411,560 / $1,294,000 * 100 = 31.81%

3. Total clean-up overhead assigned to the customer = $51,445

4. Total inspection overhead assigned to the customer = $79,915

5. Total direct cost traced to the customer = $230,000 + $150,000 = $380,000

All the best...