Question

Direct labor or machine hours may not be the appropriate cost driver for overhead in all areas of manufacturing due to the complexities of many manufacturing processes. Many companies use activity-based costing (ABC) which uses multiple drivers (items that consume resources) rather than just one driver to apply overhead to their activities. With ABC, a company can use a cost driver that has a direct cause/effect relationship in its applied overhead costs.

Waterways looked into ABC as a method of costing because of the variety of items it produces and the many different activities in which it is involved. The activities listed below area sample of possible cost pools for Waterways.

Assembling		Payroll
Billing		Plant supervision
Digging trenches		Product design
Janitorial		Purchasing materials
Machine maintenance		Selling
Machine setups		Testing
Molding		Welding
Packaging

Using the following information, determine the overhead rates and the actual cost assigned for each of the activity cost pools in a possible ABC system for Waterways. (Round answers to 2 decimal places, e.g. 12.25.) WATERWAYS CORPORATION Activity Cost Pools Irrigation installation Machining (all machine use) Customer orders Shipping Design Selling Cost Drivers Labor cost Machine hours Number of orders none (direct) Cost per design Number of sales calls Estimated Overhead $1,996,500 1,598,300 29,520 N/A 736 313,500 Expected Use of Cost Drivers per Activity 13,310 31,966,000 2,460 N/A Actual Use of Drivers 13,292 31,967,000 2,426 traced directly 20,900 21,100

Answer 1

Answer are given below in C and E Coloumn
			Answers		Answers
	Est O/h (A)	Est use of cost drivers (B)	Activity Based overhead rate C= (A/B)	Actual use of cost drivers (D)	Actual cost assigned (E= C*D)
Irrigation Installation	19,96,500	13,310	150.00	13,292	19,93,800.00
Machine	15,98,300	3,19,66,000	0.05	3,19,67,000	15,98,350.00
Cust. Orders	29,520	2,460	12.00	2,426	29,112.00
Design	736	8	92.00	7	644.00
Selling	3,13,500	20,900	15.00	21,100	3,16,500.00
Overhead rate is determined by dividing the use of cost driver with estimated overhead.
Actual cost is determined by multiplying the overhead rate with actual use of drivers units.