Question

Problem 2 The controller for the XZY Company has established the following overhead pools and cost drivers: Overhead Cost Pool Budgeted Overhead Cost Cost Driver Machine setups $100,000 Number of setups Material Handling $50,000 Units of Raw Material Quality control inspections $37,500 Number of Inspections Other overhead costs $100,000 Machine Hours Overhead Cost Pool Budgeted Level for Cost Driver Pool Overhead Rate Machine setups 100 setups $1,000 per setup Material Handling 50,000 units $1 per unit Quality control inspections 1,000 inspections $37.50 per inspection Other overhead 20,000 machine hours $5 per machine hour Order number 542 has the following production requirements: Machine setups 4 setups Raw Material 10,000 units Inspections 10 inspections Machine hours 500 machine hours

a. Compute the total overhead that should be assigned to Order number 542 using Activity Based Costing.

b. Suppose that the XYZ Company were to use a single predetermined overhead rate based on machine hours. Compute the overhead rate per machine hour and the overhead that would be assigned to Order number 542.

c. Which method results in a more accurate allocation of overhead and why? Why is this so important?

Answer 1