Question

Hickory 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 $732,100 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	$	209,000	10,000	MHs
Machine setups	Number of setups	$	171,100	290	setups
Product design	Number of products	$	93,000	2	products
General factory	Direct labor-hours	$	259,000	12,000	DLHs

Activity Measure	Product Y	Product Z
Machine-hours	7,900	2,100
Number of setups	50	240
Number of products	1	1
Direct labor-hours	8,900	3,100

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

a. Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to Product Y and Product Z?

b.  What is the activity rate for the Machining activity cost pool?

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

d. What is the activity rate for the Product Design activity cost pool?

e. What is the activity rate for the General Factory activity cost pool?

f. Which of the four activities is a batch-level activity?

g. Which of the four activities is a product-level activity?

h. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Y?

i. Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Z?

j. Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z?

k. Using the ABC system, what percentage of the Machining costs is assigned to Product Y and Product Z?

l. Using the ABC system, what percentage of Machine Setups cost is assigned to Product Y and Product Z?

m. Using the ABC system, what percentage of the Product Design cost is assigned to Product Y and Product Z?

n. Using the ABC system, what percentage of the General Factory cost is assigned to Product Y and Product Z?

Answer 1

1. Plant wide overhead rate => Overhead/total DLH ie., 732,100/12000 = 61.01

A.

• Plant Y =61.008×8900 hrs = 542,975 $
• Plant Z = 61.008×3100 = 189,125 $

B,C,D,E

Activity Cost rate

Machining	209,000/10,000= 20.9
Machine set up	171,100/290 = 590
Product design	93,000/2 = 46500
General Factory O/H	259 000/12000 = 21.58

F. Batch level activity: Machine set up.

G. Product level activity: product design

H,I

Overheads based on ABC ($)

	Plant Y	Plant Z
Machining	7900×20.9 = 165,110	43,890
Machine set up	590×50 = 29,500	141,600
Product design	46,500	46,500
General factory O/H	192,092	66,908
Total	433,202	298,898

J. Plant wide overhead rate,:

• Plant Y = 542975/732100×100 = 74.17%
• Plant Z = 189125/732100×100 = 25.83%

K,L,M,N.

Percentage of overheads under ABC:

	Plant Y	Plant Z
Machining	7900/10000×100 = 79%	2100/10000×100 = 21%
Machine Set up	50/290×100 = 17.24%	240/290×100 = 82.76%
Product Design	1/2×100 = 50%	1/2×100 = 50%
General Factory O/H	8900/12000×100 = 74.17%	3100/12000×100 = 25.83%