Question

1. Aztec Builders allocates manufacturing overhead to jobs based on machine hours. The company has the following estimated costs for the upcoming year:

Direct materials used	$25,000
Direct labour costs	$62,000
Salary of factory supervisor	$50,000
Advertising expense	$33,000
Heating and lighting costs for factory	$21,000
Depreciation on factory equipment	$41,000
Sales commissions	$8,000

The firm estimates that 1,800 direct labour hours will be worked in the upcoming year, while 2,000 machine hours will be used during the year. The predetermined indirect allocation rate per machine hour is closest to

1. $56.
2. $36.
3. $100.
4. $15.
5. $40.

2. Blockbuster Entertainment manufactures digital video equipment. For each unit $1725 of direct material is used and there is $1,500 of direct manufacturing labour at $30 per hour. Manufacturing overhead is applied at $35 per direct manufacturing labour hour. Calculate the cost of each unit.
   1. $4,975
   2. $4,025
   3. $1,750
   4. $3,150
   5. $4,725

3. In an activity-cost pool
   1. a measure of the activity performed serves as the cost allocation base.
   2. the costs have a cause-and-effect relationship with the cost-allocation base for that activity.
   3. the cost pools are homogeneous over time.
   4. costs in a cost pool can always be traced directly to products.
   5. each pool pertains to a narrow and focused set of costs.

Answer the following question(s) using the information below.

Peter’s Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2019, manufacturing overhead cost estimates total $400,000 for an annual production capacity of 16 million pages.

For 2019, Peter’s Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool	Manufacturing overhead costs	Activity level
Design changes	$60,000	400 design changes
Setups	300,000	5,000 setups
Inspections	40,000	8,000 inspections
Total manufacturing overhead costs	$400,000

During 2019, two customers, World Makers and Happy Studios, are expected to use the following printing services:

Activity	World Makers	Happy Studios
Pages	60,000	76,000
Design changes	10	0
Setups	20	10
Inspections	30	38

4. What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 16 million pages of production capacity?
   1. $0.05 per page
   2. $0.035 per page
   3. $0.35 per page
   4. $0.025 per page
   5. $0.045 per page

5. Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for World Makers during 2019?
   1. $2,500
   2. $21,000
   3. $1,500
   4. $2,700
   5. $2,100

6. Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?
   1. $200 per change, $64 per setup, $5 per inspection
   2. $180 per change, $76 per setup, $4 per inspection
   3. $150 per change, $64 per setup, $5 per inspection
   4. $150 per change, $60 per setup, $5 per inspection
   5. $200 per change, $5 per setup, $64 per inspection

Answer 1

1. (a) $56

Explanation:

Total Manufacturing Overheads = Salary of factory supervisor + Heating and lighting costs for factory +  Depreciation on factory equipment

= $50,000 + $21,000 + $41,000

= $112,000

Manufacturing Overhead Allocation rate = Total Manufacturing Cost / Number of machine hours

= $112,000 / 2,000 hours

= $56 per machine hour

2. (a) $4,975

Explanation:

Manufacturing overhead cost = DLH * Allocation Rate

= ($1,500 / $30) * $35 i.e. $1,750

Per unit Cost = Direct Material cost + Direct Labor cost + Manufacturing Overhead Cost

= $1,725 + $1,500 + $1,750

= $4,975

3. (b) the costs have a cause-and-effect relationship with the cost-allocation base for that activity.

4. (d) $0.025 per page

Explanation:

Cost Driver rate = Total activity cost / Total activity of cost driver

= $400,000 / 16,000,000 pages i.e. $0.025 per page

5. (c) $1,500

Explanation:

Cost to be allocated to Wrold Makers = Cost driver rate * Level of activity

= $0.025 per page * 60,000 pages

= $1,500

6. (d) $150 per change, $60 per setup, $5 per inspection

Explanation:

	Overhead cost	Activity level	Cost per activity
Design Changes	$60,000	400 design changes	$150 per design change
Setup	$300,000	5,000 setups	$60 per setup
Inspections	$40,000	8,000 inspections	$5 per inspection
	$400,000