Hickory Company manufactures two products—13,000 units of Product Y and 5,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all $813,600 of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:
Activity Cost Pool | Activity Measure | Estimated Overhead Cost | Expected Activity | |
---|---|---|---|---|
Machining | Machine-hours | $ 249,600 | 12,000 | MHs |
Machine setups | Number of setups | $ 162,400 | 280 | setups |
Product design | Number of products | $ 92,000 | 2 | products |
General factory | Direct labor-hours | $ 309,600 | 14,400 | DLHs |
Activity Measure | Product Y | Product Z |
---|---|---|
Machine-hours | 7,800 | 4,200 |
Number of setups | 40 | 240 |
Number of products | 1 | 1 |
Direct labor-hours | 8,800 | 5,600 |
1. What is the company’s plantwide overhead rate?
2. Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to Product Y and Product Z?
3. What is the activity rate for the Machining activity cost pool?
1. Plantwide overhead rate = Estimated overhead costs/Expected direct labor hours = $813600/14400 = $56.50 per direct labor hour
2.
Product Y | Product Z | |
Direct labor hours | 8800 | 5600 |
Overhead rate $ | 56.50 | 56.50 |
Manufacturing overhead cost allocated $ | 497200 | 316400 |
3, 4, & 5
Activity Cost Pool | Estimated Cost $ | Expected Activity | Activity Rate $ |
Machining | 249600 | 12000 | 20.80 |
Machine setups | 162400 | 280 | 580 |
Product design | 92000 | 2 | 46000 |
1.
2.
Plantwide overhead rate = Estimated overhead / Estimated direct labor hours = $813,600/14400 = $56.5 per direct labor hour
Overhead allocated to Product Y = 8800*$56.5 = $497,200
Overhead allocated to Product Z = 5600*$56.5 = $316,400
Using the Plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z:
Product Y = $497,200 / $813,600 = 61.111%
Product Z = $316,400 / $813,600 = 38.889%
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