Question

Q3)

Airspace, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 60 range instruments and 400 pressure gauges were produced, and overhead costs of 101,600 OMR were estimated. An analysis of estimated overhead costs reveals the following activities.

Activities	Cost Drivers	Total Cost in OMR
Materials handling	Number of requisitions	42,000
Machine setups	Number of setups	24,600
Quality inspections	Number of inspections	35,000
Total cost		101,600

The cost driver volume for each product was as follows.

Cost Drivers	Instruments	Gauges	Total
Number of requisitions	450	550	1,000
Number of setups	200	400	600
Number of inspections	250	450	700

                                                                       

1. Determine the overhead rate for each activity.

2. Assign the manufacturing overhead costs for April to the two products using activity-based costing.

Write a memorandum to the president of Air United explaining the benefits of activity-based costing

Answer 1

Answer :

(a) Overhead Rate = (Overhead for each activity / Total of cost drivers)

Activities	Total cost	Total cost drivers	Overhead Rate in OMR
Material handling	42000	1000	42
Machine Set up	24600	600	41
Quality inspections	35000	700	50

(b). Allocation of overhead on the basis on Activity Based costing

Acitivities	Total cost	Overhead Rate in OMR	Missile Range	Space Pressure
Material Handling	42000	42	18900 (42*450)	23100 (42*550)
Machine set up	24600	41	8200 (41*200)	16400 (41*400)
Quality inspections	35000	50	12500 (250*50)	22500 (450*50)
Total	-	-	39600	62000

(c). Benefits of activity based costing

1. Allocates manufacturing overhead more accurately to products and processes that use the activity
2. Identifies inefficient processes and target for improvements
3. Determines product profit margines more precisely
4. Discovers which processes have unnecessary and wasted costs.