Question

Snowden Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows:

Activity Pools	Cost Pool Total			Cost Driver
Repair and maintenance on assembly machine	$	104,000		Number of units produced
Programming cost		168,000		Number of programming hours
Software inspections		12,000		Number of inspections
Product testing		16,000		Number of tests
Total overhead cost	$	300,000

Expected activity for each product follows:

	Number of Units			Number of Programming Hours			Number of Inspections			Number of Tests
Decoder P		16,000			2,000			190			1,400
Decoder Q		36,000			1,500			60			1,100
Total		52,000			3,500			250			2,500

Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow:

	Direct Labor Hours
Decoder P		8,000
Decoder Q		16,000
Total		24,000

Required

1. Compute the amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base.

2. Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC.

Answer 1

a. Amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base:

b. the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC:

Activity rate

Allocation of overhead based on ABC