Question

College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and Identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center. Estimated Cost Estimated Cost Driver Units Recommended Activity Cost Driver Number of production Setting up production runs Processing orders Number of orders Handling materials Pounds of materials Using machines Machine-hours Providing quality management Number of inspections Packing and shipping Units shipped $ 32,000 48,000 18,000 84,000 48,000 40,000 $270,000 100 runs 200 orders 9,000 pounds 12,000 hours 40 inspections 20,000 units In addition, management estimated 2,000 direct labor-hours for year 5. Assume that the following cost driver volumes occurred in February, year 5. Short 900 $3,000 Medium 400 $2,000 Tall 400 $1,500 120 90 130 Number of units produced Direct materials costs Direct labor-hours Number of orders Number of production runs Pounds of material Machine-hours Number of inspections Units shipped 500 400 4 900 200 200 200 1 2 900 400 300 Direct labor costs were $20 per hour. Required: a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base. b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed In requirement a c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed In requirement a. (Note: Do not assume that total overhead applied to products In February will be the

Answer 1

a.
Predetermined rate using labor hours = Total overhead / Total number of labor hours = 270,000 / 2,000 = $ 135 per hour

Activity	Cost Driver	Estimated Cost	Estimated Cost Driver Units	Rate
Setting up production	Number of production runs	$           32,000	100 units	$       320
Processing orders	Number of orders	$           48,000	200 orders	$       240
Handling materials	Pounts of materials	$           18,000	9,000 pounds	$           2
Using Machines	Machine hours	$           84,000	12,000 hours	$           7
Providing quality management	Number of inspections	$           48,000	40 inspections	$    1,200
Packing and shipping	Units shipped	$           40,000	20,000 units	$           2
		$         270,000

b.

	Short	Medium	Tall	Total
Direct materials costs	$     3,000	$    2,000	$    1,500	$    6,500
Direct labor costs	$     1,800	$    2,600	$    2,400	$    6,800
Overhead costs	$   12,150	$ 17,550	$ 16,200	$ 45,900
Total	$   16,950	$ 22,150	$ 20,100
Number of units	900	400	400
Per unit	$     18.83	$   55.38	$   50.25

c.

	Short	Medium	Tall
Setting up production	$      640	$   1,280	$   2,880
Processing orders	$   1,920	$   1,920	$   1,200
Handling materials	$   1,000	$   1,800	$      400
Using Machines	$   2,800	$   1,400	$   1,400
Providing quality management	$   2,400	$   1,200	$   2,400
Packing and shipping	$   1,800	$      800	$      600
Total Overhead cost	$ 10,560	$   8,400	$   8,880

	Short	Medium	Tall	Total
Direct materials costs	$     3,000	$    2,000	$    1,500	$    6,500
Direct labor costs	$     1,800	$    2,600	$    2,400	$    6,800
Overhead costs	$   10,560	$    8,400	$    8,880	$ 27,840
Total	$   15,360	$ 13,000	$ 12,780
Number of units	900	400	400
Per unit	$     17.07	$   32.50	$   31.95