Question

Hickory 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 $684,000 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
Product design	Number of products	$	84,000	2	products
General factory	Direct labor-hours	$	300,000	12,000	DLHs

Activity Measure	Product Y	Product Z
Machine-hours	7,000	3,000
Number of setups	50	150
Number of products	1	1
Direct labor-hours	8,000	4,000

1.What is the company's plantwide overhead rate?

2.Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to Product Y and Product Z?

3.What is the activity rate for the Machining activity cost pool?

4.What is the activity rate for the Machine Setups activity cost pool?

5.What is the activity rate for the Product Design activity cost pool?

6.What is the activity rate for the General Factory activity cost pool?

7.Which of the four activities is a batch-level activity?

	General factory activity
	Machine setups activity
	Product design activity
	Machining activity

8.Which of the four activities is a product-level activity?

	Machining activity
	Product design activity
	General factory activity
	Machine setups activity

9.Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Y? (Do not round intermediate calculations.)

10.Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Z? (Do not round intermediate calculations.)

11.Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z? (Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

12.Using the ABC system, what percentage of the Machining costs is assigned to Product Y and Product Z?

13.Using the ABC system, what percentage of Machine Setups cost is assigned to Product Y and Product Z?

14.Using the ABC system, what percentage of the Product Design cost is assigned to Product Y and Product Z?

15.Using the ABC system, what percentage of the General Factory cost is assigned to Product Y and Product Z? (Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Answer 1

Concepts and reason

Activity based costing: Activity based costing is one the methods of costing that identifies the activities performed in the company to assign the cost to each activity. It assigns cost to each activity on the basis of actual consumption by each product produced. It assigns cost to each activity using the cost drivers.

Predetermined Overhead rate: Predetermined overhead rate is used to apply manufacturing overhead to work in process inventory. Usually this predetermined overhead rate will be calculated at the beginning of the period. This rate is used to charge overhead costs to a particular job. It is calculated by dividing the overhead cost with the labor hours or machine hours as per the policy adapted by a company.

Predetermined overhead rate will be calculated by using the following formula:

Fundamentals

Plant wide overhead rate: It is a rate at which the costs (usually manufacturing overhead cost) are allocated or assigned to the output from the production department. It is used only when there is only one defined factor to assign the costs. It is not used in case the company manufactures variant products where some of them use expensive and others may use inexpensive equipment/assets.

Company’s plant wide overhead rate is calculated by dividing the total overhead cost with number of direct labor hours.

Allocation of manufacturing overhead to each product is calculated on the basis of the number of direct labor hours used by each product.

Activity rate is calculated by dividing the overhead cost of the activity with the number of number of cost centers.

1.

Compute the plant wide overhead rate as shown below:

2.

a.

Compute the overhead rate allocated to Product Y as shown below:

2.

b.

Compute the overhead rate allocated to Product Z as shown below:

3.

Compute the activity rate for the machining activity as shown below:

4.

Compute the activity rate for the machine set ups activity as shown below:

5.

Compute the activity rate for the product design activity as shown below:

6.

Compute the activity rate for the general factory activity as shown below:

7.

Machine set ups activity is the batch level activity because for each batch they are required to set up the machine.

8.

Product design activity is the Product - level activity because it is based on the number of manufactured.

9.

Calculate the manufacturing overhead cost to be assigned to the product Y using ABC system as shown below:

10.

Calculate the manufacturing overhead cost to be assigned to the product Z using ABC system as shown below:

11.

Calculate the percentage of the total overhead cost allocated to products Y and Z as shown below:

12.

Calculate the percentage of machining costs to be allocated to products Y and Z as shown below:

13.

Calculate the percentage of machine set ups cost to be allocated to products Y and Z as shown below:

14.

Calculate the percentage of product designs cost to be allocated to products Y and Z as shown below:

15.

Calculate the percentage of general factory costs to be allocated to products Y and Z as shown below:

Ans: Part 1

The plant wide overhead rate is $57 per direct labor hour.

Part 2a

The overhead allocated to product Y is $456,000.

Part 2b

The overhead allocated to product Z is $228,000.

Part 3

The activity rate for the machine activity is $20 per machine hour.

Part 4

The activity rate for the machine set ups activity is $500 per set up.

Part 5

The activity rate for the product design activity is $42,000 per product.

Part 6

The activity rate for the general factory activity is $25 per direct labor hour.

Part 7

Machine set ups activity is the batch level activity.

Part 8

Product design activity is the product level activity.

Part 9

Total overhead cost to be assigned to the product Y is $407,000.

Part 10

Total overhead cost to be assigned to the product Z is $277,000.

Part 11

Percentage of the overhead cost to be assigned to the product Y & Z are 66.67% & 33.33% respectively.

Part 12

Percentage of the machining costs to be allocated to the product Y & Z are 70% & 30% respectively.

Part 13

Percentage of the machine set ups cost to be allocated to the product Y & Z are 25% & 75% respectively.

Part 14

Percentage of the product designs cost to be allocated to the product Y & Z are 50% & 50% respectively.

Part 15

Percentage of the general factory costs to be allocated to the product Y & Z are 66.67% & 33.33% respectively.