Question

3. The controller for Mitchell Supply Company has established the following overhead cost pools and cost drivers: Overhead Cost Pool Machine setup Material handling Budgeted Overhead Cost $150,000 52,500 Cost Driver Number of setups Units of raw material Number of inspections Machine hours Quality control inspectiorn Other overhead costs Total 37,500 90,000 330000 Requirements of Order no.610 5 setup 10,000 per unit Budgeted Level For Cost Driver Overhead Cost Pool Machine setup Material handling Quality control Other overhead 100 setups 50,000 units 1,000 inspections 15,000 machine 12 inspection 600 machine hour hours Required: A. Compute the total overhead that should be assigned to order no. 610 by using activity-based costing. Suppose that Mitchell were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 610. Discuss the merits of an activity-based costing system in comparison with a traditional costing system. B. C. 12+3+5 marks)

Answer 1

control S450 5 Other overhead 6 Total overhead $3,600 S22,050 8 B 9 Rate per hour 10 Total overhead assigned to Order no. 610 S22 per machine hour $13,200 12 C 13 Merits of ABC costing 14 It helps in allocating overhead cost more accurately than traditional costing 15 It provides the information about cost behavior 16 It helps in tracing the overhead costs with respect to cost objects accurately 17 Better decision making is done using ABC costing instead of traditional costing Calculations are shown below 4 5 Other overhead 6 Total overhead 37500/1000) 12 90000/15000) 600 control SUMB2 B5 8 B Rate per hour 10 Total overhead assigned to Order no. 610 330000/15000 B9 600 machine hour 12 C 13 Merits of ABC costiin 14 It helps in allocating overhead cost more accurately than traditional cos 15 It provides the information about cost behavior 16 It helps in tracing the overhead costs with re 17 Better decision to cost ob ABC costing instead of traditional cos is done u