Question

XYZ 4 You have been recently hired by this company to review the costing of chemicals and reaize that maybe a predetermined overhead rate does not give an accurate cost picture 5 You remember discussing overhead cost issues in MBA641 and want to implement ABC, so you have done some research and come up with the following activity cost pools and cost drivers Budgeted Overhead CostCost driver Budgeted Level Activity for cost DriverPool Rate 30,000 Activity cost Pool 30,000 of raw $1.00 9 Quality Assurance 20,000 Number of 0 contro 100,000 used in pounds 8,000 1 Other overhead costs 12 Total Budgeted overhead cost $350,000 15 1. Using the information above calculate the single predetermined 16 Predetermined overhead rate: 18 2. If the company uses the ABC approach, what would be the pool rates for the actvties you have identfed above 19 I have computed the first pool rate above in column E and you should compute the remainder of the rates for the other 3 actvities 1 3. An order for a special chemical mix has the following production requirements 23 Material handling 4 Quality Assurance 5 Hazardous waste control 2000 Weight of raw materials in pounds 10 Number of quality checks 200 Weight of hazardous chemicalused in pounds 1000 Machine hours 8 If the company is using the predetermined overhead rate based on machine hours, what is the overhead cost for this order? Total Overhead cost of this order using a 9 predetermined overhead rate 31 If the company is using the ABC method, what is the overhead cost for this order? 32 Material handling 3 Quality Assurance 4 Hazardous waste S Other overhead costs 6 Total Overhead cost of this order using ABC 8 4. Write a short report (at least 75 words) that identifies factors that explain why the two product-costing systems result in differing costs 9 Which system do you recommend? Why? 45 16

Answer 1

1. Predetermined Overhead Rate = Total Budgeted Cost / Budgeted cost driver

Predetermined Overhead Rate = 350,000/100,000 = $3.50

2.

Activity cost pool	Budgeted Overhead cost	Cost driver	Budgeted level for cost driver	Activity Pool Rate (Budgeted overhead cost / Budgeted level for cost driver)
material handling	30000	Weight of raw material in pounds	30000	$ 1.00
Quality Assurance	20000	Number of quality checks	1000	$ 20.00
Hazardous waste Control	100000	Weight of Hazardous chemicals used in pounds	8000	$ 12.50
other overhead cost	200000	machine hours	100000	$ 2.00
Total budgeted overhead cost	350000

3. If the predetermined rate is used , the overhead cost for this special order is = $3500 ($3.5 x 1000 machine hours)

If the company uses ABC method, overhead cost for this order is $
	Activity Pool rate	Actual Activity	Overhead cost
material handling	$ 1.00	2000	$ 2,000.00
Quality Assurance	$ 20.00	10	$ 200.00
Hazardous waste Control	$ 12.50	200	$ 2,500.00
other overhead cost	$ 2.00	1000	$ 2,000.00
Total overhead cost of this special order using ABC			$6,700.00