Question

Texas Co. established the following overhead cost pools and cost drivers: Budgeted Estimated Overhead Cost Pool Overhead Cost Driver Cost Driver Level Quality controls $780,000 # of inspections 26,000 inspections Machine setups $720,000 # of setups 12,000 setups Other overhead costs $900,000 # of machine hrs 50,000 machine hrs Total overhead costs $2,400,000 A recent order for sailboats used: Quality inspections 750 inspections Machine setups 500 setups Machine hours (MHs) 2,400 machine hours Required: a. What is the overhead rate per machine hour if the number of machine hours (MHs) is used as a single cost driver under traditional costing system?

b. Utilizing traditional costing, how much overhead is assigned to the order based on machine hours as a single cost driver?

c. Utilizing ABC, how much total overhead is assigned to the order?

Answer 1

A) Overheads rate per machine hour if the number of machine hours(MH) is used as single cost drivers is as follow

Particulars	Amount
Total cost (1)	$2400000
Machine Hours (2)	50000
Overheads rate per machine hour(1/2)	$48

B) Overhead cost assigned to new order on the basis of traditional costing is as follow

Particulars	Amount
Total Machine Hours required for new order ( 3)	2400
Overheads rate per machine hour(4)	$48
Total overhead Cost Assigned {3*4}	$115200

C) Overhead cost assigned to new order on the Basis of ABC Costing is as follow

Step1- Calculation of ABC rate

Cost centre	Total Cost (5)	Basis (6)	overhead rate per cost centre (5/6)
Inspection Cost	$780000	26000 Inspection	$30 per inspection
Machine Cost	$720000	12000 Setups	$ 60 per Setups
Other cost	$900000	50000 MLH	$18 per Machine Hour

Step 2- Calculation of overhead cost allocated to new order

Cost centre	Total Requirment for new order (7)	Overhead rate per cost centre (8)	Total Cost (7*8)
Inspection Cost	750 Inspection	$30 per inspection	$22500
Machine Cost	500Setups	$ 60 per Setups	$30000
Other cost	2400 Machine Hours	$18 per Machine Hour	$43200
		Total cost	$95700

So overhead cost allocated to new order as per ABC Costing is $ 95700