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

Foundational 4-1

Required:

1. What is the company’s plantwide overhead rate?

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

Foundational 4-1

Required:

1. What is the company’s plantwide overhead rate?

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

Foundational 4-1

Required:

1. What is the company’s plantwide overhead rate?

2 . Using the plant wide overhead rate, how much manufacturing overhead cost is allocated to Product Y and Product Z?

3. What is the activity rate for the Machining activity cost pool per mph?

4. What is the activity rate for the Machine Setups activity cost pool?

Answer 1

Overhead Rate as per Traditional costing =$684,000 / 12,000 =$57 per direct labor hours
	Product Y	Product Z
Overhead Rate as per Traditional costing	$                          57.00	$                                        57.00
Direct labor Hours	9000	3000
Allocated Overhead Costs as per Traditional costing	$                      513,000	$                                    171,000
Computation of ABC rate
Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
Machining	$                      200,000	10,000	$                                              20	per machine hrs
Machine Setups	$                      100,000	200	$                                            500	per setup
So Activity Rate for Machining activity cost pool is $20 per machine hours
Activity Rate for Machine Setup cost pool is $500 per setup