Question

Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data: Cost Driver Volume Activity Cost Driver Cost Pencils Pens Setting up Number of setups $ 96,000 17 31 Inspecting Number of parts 29,000 4 6 Packing and shipping Number of boxes shipped 50,000 55,000 70,000 Total overhead $ 175,000 Required: a. Compute the amount of overhead to be allocated to each product under activity-based costing. b. Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.1 for pencils and 0.2 for pens and that 55,000 boxes of pencils and 70,000 boxes of pens were produced during the period.

Answer 1

a)
					Mechanical Pencils	Pens
	Activity	Total OH Cost	Total Cost Driver	OH Rate	Driver Incurred	OH Cost assigned	Driver Incurred	OH Cost assigned
	Setting Up	96000	48	2000.00	17	34000	31	62000
	Inspecting	29000	10	2900.00	4	11600	6	17400
	Packing and Shipping	50000	125000	0.40	55000	22000	70000	28000
	Total	175000				67600		107400
		Overhead
	Pencils	67600
	Pens	107400
b)				Mechanical Pencils	Pens
	Total OH Cost	Total Labour hour(Note 1)	OH Rate	Driver Incurred	OH Cost assigned	Driver Incurred	OH Cost assigned
	175000	19500	8.97	5500	49,359	14000	125,641
	Note 1: labour Hour
		Mechanical Pencils	Pens	Total
	Labour hr required to produce 1 box	0.1	0.2
	No. of boxes	55000	70000
	Total Labour Hour	5500	14000	19500
		Overhead
	Pencils	49,359
	Pens	125,641