Question

East Horizon uses ABC to account for its chrome wheel manufacturing process. Company managers have identified four manufacturing activities that incur manufacturing overhead​ costs: materials​ handling, machine​ setup, insertion of​ parts, and finishing. The budgeted activity costs for the upcoming year and their allocation bases are as​ follows:

	Total Budgeted
	Manufacturing
Activity	Overhead Cost			Allocation Base
Materials handling. . . .		$8,700		Number of parts
Machine setup. . . . . . .		4,650		Number of setups
Insertion of parts. . . . .		49,300		Number of parts
Finishing. . . . . . . . . . . .		75,600		Finishing direct labor hours
Total. . . . . . . . . . . . .		$138,250

East horizon expects to produce 1,000 chrome wheels during the year.

The wheels are expected to use 2,900 ​parts, require 15 setups, and consume 1,800 hours of finishing time.

Job 420 used 100 ​parts, required 3 setups, and consumed 130 finishing hours .

Job 510 used 450 ​parts, required 4 ​setups, and consumed 300 finishing hours.

1.	Compute the cost allocation rate for each activity.
2.	Compute the manufacturing overhead cost that should be assigned to Job 420.
3.	Compute the manufacturing overhead cost that should be assigned to Job 510.

Answer 1

1. Computation of cost allocation rate

Activity	Overhead cost($)	Allocation Base	allocation rate
Materials handling	8,700	No. of parts (2,900)	3 per part (8,700 / 2,900)
Machine setup	4,650	No. of setups (15)	310 per setup
Insertion of parts	49,300	No. of parts (2,900)	17 per part
Finishing	75,600	Finishing labour hours (1,800)	42 per labour hours

2. Computation of manufacturing overhead costs for Job 420

Activity	Allocation rate	Times	Cost allocation($)
Materials handling	3 per part	100 parts	300 (3*100)
Machine setup	310 per setup	3 setup	930
Insertion of parts	17 per part	100 parts	1,700
Finishing	42 per labour hours	130 labour hours	5,460
Total Manufacturing overhead costs for Job 420	8,390

2. Computation of manufacturing overhead costs for Job 510

Activity	Allocation rate	Times	Cost allocation($)
Materials handling	3 per part	450 parts	1350 (3*450)
Machine setup	310 per setup	4 setup	1,240
Insertion of parts	17 per part	450 parts	7,650
Finishing	42 per labour hours	300 labour hours	12,600
Total Manufacturing overhead costs for Job 510	22,840