Question

 

In activity-based costing, the activity rate for an activity cost pool is computed by dividing the total overhead cost in the activity cost pool by:

 

Multiple Choice

• the total activity for the activity cost pool.
• the direct labor-hours required by the product.
• the machine-hours required by the product.
• the total direct labor-hours for the activity cost pool.

Answer 1

Correct Answer –the total Activity for the activity cost pool.

Explanation

Activity rate for each activity depends on multiple cost drivers such as labor hour, machine hours , setup hours, inspections etc. all the driver’s total quantity is used to calculate activity rate for each activity and not just one activity driver.

Given below is schedule of activity rates for better understanding.

Calculation of Activity rates
Activity Cost Pool	Activity Measure	Estimated Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machining	Machine-hours	$       568,484.00	10,000	$                          56.85	Per MHs
Machine setups	Number of setups	$ 15,442,154.00	290	$                 53,248.81	Per setups
Production design	Number of products	$         55,485.00	2	$                 27,742.50	Per products
General factory	Direct labor-hours	$         21,245.00	12,000	$                            1.77	Per DLHs
Total		$    16,087,368.00