Activity Cost Pools:Cost Drivers: Pool Rates
The controller for Tulsa Photographic Supply Company has established the following activity cost pools and cost drivers.
Activity Cost Pool | Budgeted Overhead Cost | Cost Driver | Budgeted Level for Cost Driver | Pool Rate |
Machine setups | $250,000 | Number of setups | 125 | $2,000per setup |
Material handling | 75,000 | Weight of raw material | 37.500 lb. | $2 per pound |
Hazardous waste | Weight of hazardous | |||
control | 25,000 | chemicals used | 5,000 lb | $5per pound |
Quality control | 75,000 | Number of inspections | 1,000 | $75 per inspection |
other overhead costs | 200,000 | Machine hours | 20,000 | $10 per machine hour |
Total | $625,000 |
An order for 1,000boxes of film development chemicals has the following production requirements.
Machine setups | 5setups |
Raw material | 10,000pounds |
Hazardous materials | 2,00G pounds |
Inspections | 10 inspections |
Machine hours | 500 machine hours |
Required:
1. Compute the total overhead that should be assigned to the development-chemical order.
2. What is the overhead cost per box of chemicals?
3. Suppose Tulsa Photographic Supply Company were to use a single predetermined overhead rate based on machine hours. Compute the rate per hour.
4. Under the approach in requirement (3), how much overhead would be assigned to the development chemical order?
a. In total.
b. Per box of chemicals.
5. Explain why these two product-costing systems result in such widely differing costs. Which system do you recommend? Why?
6. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1), (2), (3). and (4) above. Show how the solution will change if the following data change. The overhead associated with machine setups is $375,000, and there are 500 inspections budgeted.
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