Question

Catalytic Chemical Corporation has a significant level of manufacturing overhead. After preparing their budget for the next year, management expects the following overhead costs (the cost driver for each overhead cost pool is also shown):

Activity	Total Cost	Cost Driver
Maintenance	$20,000	Machine hours
Materials receiving	80,000	Shipments received
Machine setups	50,000	# of setups
Inspection	30,000	# of inspections

The expected activity for the year for various cost drivers is:

Direct Labor Hours	40,000
Machine Hours	20,000
Shipments Received	4,000
Setups	200
Quality Inspections	8,000

The company is considering accepting a significant production contract. Estimates for the contract are as follows:

Direct materials	$100,000
Direct labor (7,500 hours)	$150,000
Number of material shipments received	290
Number of inspections	50
Number of setups	35
Number of machine hours	3,000

NOTE: Round all per-unit costs to the nearest cent.

Required:

1. Using ABC method, what’s the pool rate for each activity?

2. What is the expected overhead allocated to this contract?

3. What’s the total cost of this contract?

Answer 1

1) Pool rate :

Activity	Estimated overhead	Estimated activity	Activity rate
Maintenance	20000	20000 MH	1 per MH
Materials receiving	80000	4000	20 per shipment
Machine setups	50000	200	250 per setup
Inspection	30000	8000	3.75 per inspection

2) Expected overhead allocation

	Overhead allocation
Maintenance	3000
Material receiving (290*20)	5800
Machine setup (250*35)	8750
Inspection (50*3.75)	187.50
Total	17737.50

3) Total Cost

Direct material	100000
Direct labor	150000
Overhead	17737.50
Total Cost	267737.50