Question

Greenwood Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost			Expected Activity
Machining	Machine-hours	$	200,000			10,000	MHs
Machine setups	Number of setups	$	100,000			200	setups
Production design	Number of products	$	84,000			2	products
General factory	Direct labor-hours	$	300,000			12,000	DLHs

Activity Measure	Product Y			Product Z
Machining		8,000			2,000
Number of setups		40			160
Number of products		1			1
Direct labor-hours		9,000			3,000

~Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z?

~Using the ABC system, what percentage of the Machining, Machine Setups, Product Design, and General Factory costs are assigned to Product Y and Product Z?

Answer 1

Using plantwide overhead rate :

Total estimated overhead cost = 200000 + 100000 + 84000 + 300000 =	684000
Plantwide predetermined overhead rate = Total estimated overhead cost / Total estimated direct labor hours = 684000 / 12000 =	57.00

	Product Y	Product Z
Plantwide predetermined overhead rate	57.00	57.00
(*) Estimate direct labor hours	9000	3000
Overhead cost allocated	513000	171000

	Product Y	Product Z
Percentage of Total overhead cost allocated [ Overhead cost allocated / Total estimated overhead cost ]	75.00%	25.00%

Using ABC system :

	Estimated overhead cost	Expected Activity	Activity rates
Machining	200000	10000	20
Machine setup	100000	200	500
Production design	84000	2	42000
General factory	300000	12000	25

Overhead allocation [ Activity rates * Activity ]	Product Y	Product Z
Machining	160000	40000
Machine setup	20000	80000
Production design	42000	42000
General factory	225000	75000

	Product Y	Product Z
Percentage of Machining cost allocated [ Machining cost allocated / Total estimated machining cost ]	80.00%	20.00%

	Product Y	Product Z
Machine setup cost [ Machine setup cost allocated / Total estimated machine setup cost ]	20.00%	80.00%

	Product Y	Product Z
Product design cost [ Product design cost allocated / Total estimated product design cost ]	50.00%	50.00%

	Product Y	Product Z
General factory cost [ General factory cost allocated / Total estimated general factory cost ]	75.00%	25.00%