Question

JUNO company allocated overhead costs to its two products (Basic and Deluxe) using ABC. Juno prepared the following annual estimates of each activity and cost driver. Overhead Cost Pool Cost Driver Budgeted Overhead Budgeted Activity (Cost Driver) Machine setups # setups $300,000 100 setups Machining # machine hours $700,000 35,000 machine hours Finishing # direct labor hours $1,000,000 10,000 direct labor hours Calculate the activity pool rate for each activity a) Machine setups b) Machining c) Finishing Calculate the total overhead applied using ABC a) Basic Product line b) Deluxe product line If JUNO used a traditional approach, with an overhead rate based on direct labor hours, calculate the, a) Predetermined overhead rate b) Overhead applied to the basic line

Answer 1

1. Calculation of Total overheads

Overheads	$
Machine setup cost	300000
Machining cost	700000
Finishing cost	1000000
Total	2000000

2. Calculation of activity pool rate

Activity	Activity cost pool	Cost driver	Quantity	ABC Rate
(a)	(b)	( c)	(d)	( e)= (b)/(d)
Machine setup cost	300000	Number of set ups	100	3000
Machining cost	700000	Number of machine hours	35000	20
Finishing cost	1000000	Number of direct labour hours	10000	100

3. Calculation of overheads applied to each activity

Overheads	Basic product line	Deluxe product line
Machine setup cost	150000	150000
	( 3000 * 50)	( 3000 * 50)
Machining cost	350000	350000
	( 20 * 17500)	( 20 * 17500)
Finishing cost	500000	500000
	(100 * 5000)	(100 * 5000)
Total overheads applied	1000000	1000000

4. Under traditional approach, pre-determined overhead rate is

Pre determined overhead rate = Total overheads / Total number of direct labor hours

= 2000000 / 10000 = 200 per hour

NOTE: Since the bifurgation of the quantity for the cost driver is not given in the question, it is assumed that 50% is allocated to Basic product line and 50% is allocated to Deluxe product line.