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	$	200,000	10,000	MHs
Machine setups	Number of setups	$	100,000	200	setups
Production design	Number of products	$	84,000	2	products
General factory	Direct labor-hours	$	300,000	12,000	DLHs

  

Activity Measure	Product Y	Product Z
Machining	8,000	2,000
Number of setups	40	160
Number of products	1	1
Direct labor-hours	9,000	3,000

a.	What is the activity rate for the Machining activity cost pool? b. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Y? c. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Z?

Answer 1

Activity Cost Pool:

Machining:

Estimated Overhead Cost = $200,000
Expected MHs = 10,000

Activity Rate = Estimated Overhead Cost / Expected MHs
Activity Rate = $200,000 / 10,000
Activity Rate = $20

Machine Setups:

Estimated Overhead Cost = $100,000
Expected setups = 200

Activity Rate = Estimated Overhead Cost / Expected setups
Activity Rate = $100,000 / 200
Activity Rate = $500

Production Design:

Estimated Overhead Cost = $84,000
Expected number of products = 2

Activity Rate = Estimated Overhead Cost / Expected number of products
Activity Rate = $84,000 / 2
Activity Rate = $42,000

General Factory:

Estimated Overhead Cost = $300,000
Expected DLHs = 12,000

Activity Rate = Estimated Overhead Cost / Expected DLHs
Activity Rate = $300,000 / 12,000
Activity Rate = $25

Answer a.

Activity Rate for Machining Activity Cost Pool = $20.00 per MH

Answer b.

Total Manufacturing Overhead = 8,000 * $20 + 40 * $500 + 1 * $42,000 + 9,000 * $25
Total Manufacturing Overhead = $447,000

Answer c.

Total Manufacturing Overhead = 2,000 * $20 + 160 * $500 + 1 * $42,000 + 3,000 * $25
Total Manufacturing Overhead = $237,000