Question

Howell Corporation's activity-based costing system has three activity cost pools--Machining, Setting Up, and Other. The company's overhead costs, which consist of equipment depreciation and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Equipment depreciation (total) $ 27,000 Indirect labor (total) $ 7,000 Distribution of Resource Consumption Across Activity Cost Pools Machining Setting Up Other Equipment depreciation 0.40 0.30 0.30 Indirect labor 0.20 0.30 0.50 Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. MHs Batches Product S4 8,100 400 Product C0 1,900 1,600 Total 10,000 2,000 Additional data concerning the company's products appears below: Product S4 Product C0 Sales (total) $ 71,400 $ 57,600 Direct materials (total) $ 21,900 $ 19,900 Direct labor (total) $ 33,700 $ 25,100 Required: a. Assign overhead costs to activity cost pools using activity-based costing. b. Calculate activity rates for each activity cost pool using activity-based costing. c. Determine the amount of overhead cost that would be assigned to each product using activity-based costing. d. Determine the product margins for each product using activity-based costing.

Answer 1

Solution:

1) Assigment of overhead cost to activity cost pool:

	Machine	Srting up	Other	Total
Equipment depreciation	27,000*0.40 =$10,800	27,000*0.30 =$8,100	27,000*0.30 =$8,100	$27,000
Indirect labor	7,000*0.20 =$1,400	7,000*0.30 =$2,100	7,000*0.50 =$3,500	$7,000
Total	12,200	10,200	11,600	34,000

2) calculation of activity rates for each activity cost pool:

	Total cost	Total machine hours	Total batch	Activity rate
Machining	12,200	10,000		12,200/10,000 =1.22
Setting up	10,200		2,000	10,200/2,000 = 5.1

3)Amount of overhead cost that would be assigned to each product using activity based costing.

	Machining cost	Setting cost	Total
Product S4	8,100*1.22=9,882	400*5.1 =2,040	11,922
Product C0	1,900*1.22 =2,318	1,600*5.1 =8,160	10,478

4)

Determibe margin

	Product S4	Product C0
Sales	$71,400	$57,600
Direct material	($21,900)	($19,900)
Direct labor	($33,700)	($25,100)
Activity cost	($11,922)	($10,478)
Margine	$3,878	$2,122

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