Question

Assume a company that uses activity-based costing (ABC) has only two products – A and B. The company does not have any organization-sustaining activities or unused capacity costs. The company’s total manufacturing overhead cost of $56,000 has been allocated to the three activities shown below:

	Setups				Machining				Packing Orders
Activity measure quantity: Product A		20				1,000				150
Activity measure quantity: Product B		20				?				350
Overhead cost per activity cost pool		?				?			$	10,000
Activity rate	$	150	per setup		$	8	per MH			?

If the company decided to use a plantwide overhead rate with machine-hours as the allocation base, what would be its plantwide overhead rate?

Answer 1

Answer:

Plantwide overhead rate = $ 11.20

Calculations:

If we complete the table, we get:

	Setups	Machining	Packing Orders
Activity measure quantity: Product A	20.0	1,000.0	150.0
Activity measure quantity: Product B	20.0	4,000.0	350.0
Overhead cost per activity cost pool	$ 6,000.0	$ 40,000.0	$        10,000.0
Activity rate	$    150.0	$           8.0	$               20.0

Note:

We can observe that total machine hours = 4,000 + 1000 = 5,000

Plantwide overhead rate = $ 56,000 / 5,000 = $ 11.2

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