Question

Penty's Fine Furniture manufactures two models of chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

	Standard	Deluxe
# DL Hours	924	930
# Set Ups	28	62
# Components	5	8

Total estimated manufacturing overhead for the period is $860,000. Penty's currently uses a volume-based costing system with direct labor hours as the only cost driver.

a. Calculate the amount of manufacturing overhead allocated to each product under a traditional volume-based system.

Standard =   

Deluxe =

b. You have recently heard of “activity-based costing”, which attempts to allocate costs using cost drivers associated with different activities. You are able to determine of the total overhead, $95,000 is associated with costs to set up the equipment for each batch and the remaining $765,000 overhead is associated with activities related to the complexity of assembly. Calculate the amount of manufacturing overhead allocated to each product using an activity-based costing system, with the two activities mentioned.

Standard =

Deluxe =

Answer 1

a]	Predetermined OH rate = 860000/(924+930) =	$ 463.86	Per DLH
	Overhead allocated under the traditionaly system:
	Standard = 924*463.86 =		$ 428,607
	Deluxe = 930*463.86 =		$           431,390
	Total overhead allocated		$           859,996
	[Difference of $4 in total overhead is due to rounding off of rate per DLH]
b]	Calculation of activity rates under ABC:
	Activity	Total overhead	Activity Volume	Activity rate
	Setting up	$             95,000	90	$          1,055.56	per set up
	Assembly	$           765,000	13	$        58,846.15	per component
	Total	$           860,000
	Overhead allocated to products under ABC:
	Activity	Product
		Standard	Deluxe	Total
	Setting up	$             29,556	$                65,444	$              95,000
	Assembly	$           294,231	$ 470,769	$ 765,000
	Total	$           323,786	$ 536,214	$ 860,000
	Overhead allocated under the ABC system:
	Standard			$ 323,786
	Deluxe			$ 536,214
	Total overhead allocated		$ 860,000