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                           $ 203,000                   10,000 MHs

Machine setups                 Number of setups                       $ 121,900                     230 setups

Production design             Number of products                     $ 87,000                      2 products

General factory                Direct labor-hours                         $ 379,500                     15,000 DLHs

Activity Measure       Product Y          Product Z

Machining                  7,300                 2,700

Number of setups          50                  180

Number of products         1                   1

Direct labor-hours        9,500              5,500

1.) What is the activity rate for the Product Design activity cost pool? (Round your answer to 2 decimal

Per Product?

2.) What is the activity rate for the General Factory activity cost pool? (Round your answer to 2 decimal places.)

​Per DLH

3.)	Which of the four activities is a batch-level activity?
	Machining activity General factory activity Product design activity Machine setups activity

Answer 1

Solution:

Activity Based Costing System

- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.

- This system determines all the activities related to product or production process.

- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.

- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.

- It helps to distribution of overheads on the basis of activities.

The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)

Part 1 --- the activity rate for the Product Design activity cost pool

Activity Rate for the Product Design Activity = Estimated Overheads related to Product Design Activity / Total Expected Activity of Product Design

= $87,000 / 2 Products

= $43,500 per product

Part 2 --- The activity rate for the General Factory activity cost pool

Activity Rate for the General Factory Activity Cost Pool = Estimated Overheads related to General Factory Activity / Total Expected Activity of General Factory i.e. Total Expected Direct labor hours

= $379,500 / 15,000 DLHs

= $25.30 per direct labor hour

Part 3 --- Which of the four activities is a batch-level activity?

Batch Processing is the processing of transactions in a group or batch. The activity which involves a batch of products as opposed to individual item is called batch level activity. An example of batch level activity is the setting up a machine to produce batch of 100 identical items.

Hence, the correction option is Machine Setups Activity is a batch level activity.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you