Question

Greife Corporation's activity-based costing system has three activity cost pools--Machining, Setting Up, and Other. The company's overhead costs have already been allocated to these cost pools as follows:

Machining	$	34,122
Setting Up	$	73,005
Other	$	24,000

Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. The following table shows the machine-hours and number of batches associated with each of the company's two products:

	MHs	Batches
Product K0	2,190	1,320
Product W9	8,150	230
Total	10,340	1,550

Additional data concerning the company's products appears below:

	Product K0		Product W9
Sales (total)	$	261,300	$	197,000
Direct materials (total)	$	79,900	$	88,100
Direct labor (total)	$	96,300	$	58,700

Required:

a. Calculate activity rates for each activity cost pool using activity-based costing.

b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

c. Determine the product margins for each product using activity-based costing.

Answer 1

Answer a)

Calculation of Activity rates for each activity cost pool using activity based costing

Cost Pools	Activity	Total Overheads (In $)	Total Activity	Activity Rate (Total overheads/ Total activity) (In $)
Machining	Machine hours	34,122	10,340	3.30
Setting Up	Number of batches	73,005	1,550	47.10

Answer b)

Calculation of overhead assigned to both products using Activity based costing

Cost Pools	Activity	Activity Rate (In $)	Activity Consumed	Assigned Overheads (Activity Rates X Activity Consumed)       (In $)
Product K0	Product W9	Product K0	Product W9
Machining	Machine hours	3.30	2,190	8,150	7,227	26,895
Setting Up	Number of batches	47.10	1,320	230	62,172	10,833
Total					69,399	37,728

Answer c)

Calculation of product margins using activity based costing

	Product K0	Product W9
Sales	261,300	197,000
Less: Total Costs
Direct Materials	79,900	88,100
Direct Labor	96,300	58,700
Overhead costs	69,399	37,728
Profit	15,701	12,472
Profit margins (Profit/Sales)	6.01%	6.33%