Question

Inside Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows:

Activity Pools	Cost Pool Total			Cost Driver
Repair and maintenance on assembly machine	$	122,400		Number of units produced
Programming cost		171,600		Number of programming hours
Software inspections		13,000		Number of inspections
Product testing		17,000		Number of tests
Total overhead cost	$	324,000

Expected activity for each product follows:

	Number of Units			Number of Programming Hours			Number of Inspections			Number of Tests
Decoder P		20,400			1,900			304			1,400
Decoder Q		47,600			1,400			96			1,100
Total		68,000			3,300			400			2,500

Assume that before shifting to activity-based costing, Snowden Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow:

	Direct Labor Hours
Decoder P		7,200
Decoder Q		16,800
Total		24,000

Required

1. Compute the amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base.

2. Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC.

Answer 1

• Requirement [a]

	Allocated Cost
Decoder P	$97,200	($324000/24000) x 7200 DLHs
Decoder Q	$226,800	($324000/24000) x 16800 DLHs
Total	$324,000

• Requirement [b]

Cost per unit
Method	Decoder P	Decoder Q
ABC	$                        7.59	$                    3.55
Labor hours	$                 4.76	$                    4.76

• Workings

Activity Pools	Cost Pool Total	Cost Driver	Total Cost driver	Allocation Rate
Repair and maintenance on assembly machine	$122,400	Number of units produced	68000	$                                 1.80
Programming cost	$171,600	Number of programming hours	3300	$                               52.00
Software inspections	$13,000	Number of inspections	400	$                               32.50
Product testing	$17,000	Number of tests	2500	$                                 6.80
Total overhead cost	$324,000

		Decoder P		Decoder Q
Activity Pools	Allocation Rate	No. of cost driver	Overhead allocated	No. of cost driver	Overhead allocated
Repair and maintenance on assembly machine	$                         1.80	20400	$                        36,720.00	47600	$      85,680.00
Programming cost	$                       52.00	1900	$                        98,800.00	1400	$      72,800.00
Software inspections	$                       32.50	304	$                          9,880.00	96	$        3,120.00
Product testing	$                         6.80	1400	$                          9,520.00	1100	$        7,480.00
		Total Allocated Cost	$                      154,920.00	Total Allocated Cost	$   169,080.00