Question

College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center.

Activity	Recommended Cost Driver	Estimated Cost			Estimated Cost Driver Units
Setting up production	Number of production runs	$	24,000		80	runs
Processing orders	Number of orders		46,800		180	orders
Handling materials	Pounds of materials		18,000		9,000	pounds
Using machines	Machine-hours		63,000		9,000	hours
Providing quality management	Number of inspections		56,000		40	inspections
Packing and shipping	Units shipped		38,000		19,000	units
		$	245,800

In addition, management estimated 2,000 direct labor-hours for year 5.

Assume that the following cost driver volumes occurred in February, year 5:

	Short			Medium			Tall
Number of units produced		1,100			500			500
Direct materials costs	$	3,000		$	2,500		$	2,500
Direct labor-hours		120			130			120
Number of orders		9			9			5
Number of production runs		2			4			8
Pounds of material		500			800			300
Machine-hours		600			200			300
Number of inspections		1			2			2
Units shipped		1,100			500			400

Direct labor costs were $20 per hour.

Required:

a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base. (Round your answers to 2 decimal places.)

b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement a. (Do not round intermediate calculations.)

c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement a.(Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.) (Do not round intermediate calculations.)

Answer 1

Solution a:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Setting up production	$24,000.00	Nos of production runs	80	$300.00
Processing orders	$46,800.00	Nos of orders	180	$260.00
Handling materials	$18,000.00	Pound of materials	9000	$2.00
Using machines	$63,000.00	Machine hours	9000	$7.00
Providing Quality management	$56,000.00	Nos of inspections	40	$1,400.00
Packing and Shipping	$38,000.00	Units shipped	19000	$2.00
Total	$245,800.00

Predetermined overhead rate using direct labor hours = Estimated overhead / Estimated direct labor hours

= $245,800 / 2000 = $122.90 per direct labor hour

Solution b:

Computation of Production Cost - Using Predetermined overhead rate For february
Particulars	Short	Medium	Tall
Direct materials costs	$3,000.00	$2,500.00	$2,500.00
Direct labor cost	$2,400.00	$2,600.00	$2,400.00
Manufacturing overhead	$14,748.00	$15,977.00	$14,748.00
Production Cost	$20,148.00	$21,077.00	$19,648.00

Solution c:

Allocation of Overhead to Products
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Short		Medium		Tall
					Usage	Allocated Costs	Usage	Allocated Costs	Usage	Allocated Costs
Setting up production	$24,000.00	Nos of production runs	80	$300.00	2	$600.00	4	$1,200.00	8	$2,400.00
Processing orders	$46,800.00	Nos of orders	180	$260.00	9	$2,340.00	9	$2,340.00	5	$1,300.00
Handling materials	$18,000.00	Pound of materials	9000	$2.00	500	$1,000.00	800	$1,600.00	300	$600.00
Using machines	$63,000.00	Machine hours	9000	$7.00	600	$4,200.00	200	$1,400.00	300	$2,100.00
Providing Quality management	$56,000.00	Nos of inspections	40	$1,400.00	1	$1,400.00	2	$2,800.00	2	$2,800.00
Packing and Shipping	$38,000.00	Units shipped	19000	$2.00	1100	$2,200.00	500	$1,000.00	400	$800.00
Total	$245,800.00					$11,740.00		$10,340.00		$10,000.00

Computation of Production Cost - Activity Based Costing For february
Particulars	Short	Medium	Tall
Direct materials costs	$3,000.00	$2,500.00	$2,500.00
Direct labor cost	$2,400.00	$2,600.00	$2,400.00
Manufacturing overhead	$11,740.00	$10,340.00	$10,000.00
Production Cost	$17,140.00	$15,440.00	$14,900.00