Question

Musich Corporation has an activity-based costing system with three activity cost pools--Machining, Setting Up, and Other. The company's overhead costs, which consist of equipment depreciation and indirect labor, have been allocated to the cost pools already and are provided in the table below.

	Activity Cost Pools
	Machining		Setting Up		Other		Total
Equipment depreciation	$	7,200	$	43,200	$	21,600	$	72,000
Indirect labor		1,200		1,800		3,000		6,000
Total	$	8,400	$	45,000	$	24,600	$	78,000

Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products and the company's costs appear below:

	MHs	Batches
Product Z3	4,900	200
Product T1	5,100	800
Total	10,000	1,000

		Product Z3		Product T1
Sales (total)	$	208,800	$	244,500
Direct materials (total)	$	78,500	$	95,400
Direct labor (total)	$	107,800	$	99,700

Required:

a. Calculate activity rates for each activity cost pool using activity-based costing.

b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

c. Determine the product margins for each product using activity-based costing.

Essay

Answer 1

a. Calculate activity rates for each activity cost pool using activity-based costing.

Cost pool	Total Cost	Total Activity	Activity rate
Machining	8400	10000	0.84
Setting up	45000	1000	45

b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

Overhead	Product Z3	Product T1	Total
Machining	4116	4284	8400
Setting Up	9000	36000	45000
Total	13116	40284	53400

c. Determine the product margins for each product using activity-based costing.

	Product Z3	Product T1
Sales	208800	244500
Direct Material	78500	95400
Direct labour	107800	99700
Overhead	13116	40284
Contribution margin	9384	9116