Question

1-Younger, Inc. manufactures recliners for the hotel industry. It has two products, the Heater and the Massager, and total overhead is $3,160,000. The company plans to manufacture 400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company must perform 600 material moves for the Heater and 400 for the Massager; it processes 900 purchase orders for the Heater and 700 for the Massager; and the company’s employees work 1,400 direct labor hours on the Heater product and 3,400 on the Massager. Younger’s total material handling costs are $2,000,000 and its total processing costs are $1,160,000. Using ABC, how much overhead would be assigned to the Heater product? $1,852,500

Answer:

2-Baxter Accounting Services estimates for next year revenues of $3,000,000, direct labor of $600,000, and overhead of $1,050,000. Under traditional costing, what is overhead rate is applied to audit jobs? 175% of direct labor

Answer:

3-Gant Accounting performs two types of services, Audit and Tax. Gant’s overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services is:

                                                              Audit                                       Tax         

Direct labor cost                                         $50,000                                  $100,000

CPU minutes                                                 40,000                                      10,000

Legal hours used                                               200                                          800

What is overhead applied to audit services using traditional costing? $150,000

What is overhead applied to tax services using traditional costing? $300,000

What is overhead applied to audit services using activity-based costing? $270,000.

What is overhead applied to tax services using activity-based costing? $180,000.

Gant Accounting performs tax services for Cathy Lane. Direct labor cost is $1,200; 600 CPU minutes were used; and 1 legal hour was used. What is the total cost of the Lane job using activity-based costing? $4,950

Answer:

Answer 1

Solution 1:

Computation of activity rate and Allocation of Overhead to Products
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Heater
					Usage	Allocated Costs
Material handling	$2,000,000.00	Nos of material moves	1000	$2,000.00	600	$1,200,000.00
Processing	$1,160,000.00	Nos of purchase order	1600	$725.00	900	$652,500.00
Total	$3,160,000.00					$1,852,500.00

Solution 2:

Overhead rate applied = Overhead applied / Direct labor cost = $1,050,000 / $600,000 = 175%

Solution 3:

Prdetermined overhead rate = Total overhead /Total direct labor cost = $450,000 / 150000 = 300% of direct labor cost

Overhead applied to audit services using traditional costing = $50,000*300% = $150,000

Overhead applied to tax services using traditional costing = $100,000*300% = $300,000

Computation of activity rate and Allocation of Overhead to Products
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Audit		Tax
					Usage	Allocated Costs	Usage	Allocated Costs
Computer Support	$300,000.00	CPU Minutes	50000	$6.00	40000	$240,000.00	10000	$60,000.00
Legal support	$150,000.00	Legal hours	1000	$150.00	200	$30,000.00	800	$120,000.00
Total	$450,000.00					$270,000.00		$180,000.00

Computation of Job Cost
Particulars	Amount
Direct labor cost	$1,200.00
computer support (600*$6)	$3,600.00
Legal support (1*$150)	$150.00
Total job cost	$4,950.00