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	$	104,500		Number of units produced
Programming cost		143,500		Number of programming hours
Software inspections		14,000		Number of inspections
Product testing		18,000		Number of tests
Total overhead cost	$	280,000

Expected activity for each product follows:

	Number of Units			Number of Programming Hours			Number of Inspections			Number of Tests
Decoder P		16,500			1,500			304			2,240
Decoder Q		38,500			1,000			96			1,760
Total		55,000			2,500			400			4,000

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		6,000
Decoder Q		14,000
Total		20,000

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

Req a:
Oh rate per DLH:
Total Overheads		280000
Divide: Total DLH		20000
Oh rate per DLH:		14
OH cost allocated
			DecoderP	DecoderQ
Number of DLH used		6000	14000
Multiply: OH rate per DLH	14	14
Oh cost allocated		84000	196000
Req b.
Oh cost per unit as per DLH allocation base:
			DecoderP	DecoderQ
Number of DLH used		6000	14000
Multiply: OH rate per DLH	14	14
Oh cost allocated		84000	196000
Divide: Units produced	16500	38500
OH cost per unit		5.09	5.09
Activity based Costing:
Activity rate:
Activity			OH cost	Drivers	OH rate
Repair and Maintenance	104500	55000	1.9
Programming cost		143500	2500	57.4
Software Inspections	14000	400	35
Product Testing		18000	4000	4.5
OH cost allocated and OH Cost per unit
Activity			Rate	Decoder P	Decoder Q
				Driver	Oh cost	Driver	Oh cost
Repair and Maintenance	1.9	16500	31350	38500	73150
Programming cost		57.4	1500	86100	1000	57400
Software Inspections	35	304	10640	96	3360
Product Testing		4.5	2240	10080	1760	7920
			Total Overheads	138170		141830
			Divide: Units Produced	16500		38500
			OH cost per unit	8.37		3.68