Question

Exercise 7-10 Eric Parker has been studying his department's profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company's approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,140,000 is based on 40,000 machine hours. In an initial analysis of overhead costs, Eric has identified the following activity cost pools. Cost Pool Product assembly Machine setup and calibration Product inspection Raw materials storage Expected Cost $ 600,000 320,000 90,000 130,000 $1,140,000 Expected Activities 40,000 Machine hours 2,000 setups 1,500 batches 500,000 pounds Eric Parker is taking the next step in his exploration of activity-based costing and wants to examine the overhead costs that would be allocated to two of the department's four products. He has gathered the following budget information about each product. Driver Usage Machine hours Setups Batches Pounds of raw materials Component 3F5 1,000 40 20 10,000 Component T76 10,000 20 10 10,000 Eric Parker found that the budget included production of 500 units of Component 3F5 and 5,000 units of Component T76. (a) Calculate the overhead cost per unit of Component 3F5 and Component T76 under traditional costing using machine hours as the overhead application base. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 2 decimal places, e.g. 52.75.)

Answer 1

Part a
	Total cost(a)	$1,140,000
	Total machine hours(b)	40000	hours
	Cost per machine hours(a/b)	$28.50
		Component 3F5	Component T76
	Machine hours allocated	1,000	10,000
	Cost per machine hours	$28.50	$28.50
	Total Overhead cost allocated	$28,500	$285,000
	No. of units produced	500	5000
	Overhead cost per unit	$57.00	$57.00
Part b
	Overhead Assigned	Activity driver	Activity Rate	Activity variable	Total Overhead cost
	Component 3F5
	Product assembly cost	Machine hours	$15.00	1000	$15,000.00
	Machine setup and calibration	No. of setups	$160.00	40	$6,400.00
	Product inspection	No. of batches	$60.00	20	$1,200.00
	Raw material storage	Pounds	$0.26	10000	$2,600.00
	Total Overhead Cost				$25,200.00
	No. of units produced				$500.00
	Overhead cost per unit				$50.40
	Overhead Assigned	Activity driver	Activity Rate	Activity variable	Total Overhead cost
	Component T76
	Product assembly cost	Machine hours	$15.00	10000	$150,000.00
	Machine setup and calibration	No. of setups	$160.00	20	$3,200.00
	Product inspection	No. of batches	$60.00	10	$600.00
	Raw material storage	Pounds	$0.26	10000	$2,600.00
	Total Overhead Cost				$156,400
	No. of units produced				$5,000
	Overhead cost per unit				$31.28
	Note:Activity Rate =Estimated Overhead cost / Total of expected activity