Question

In: Accounting

Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently...

Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data:

Cost Driver Volume
Activity Cost Driver Cost Pencils Pens
Setting up Number of setups $ 98,000 19 30
Inspecting Number of parts 30,000 4 6
Packing and shipping Number of boxes shipped 52,500 40,000 65,000
Total overhead $ 180,500

Required:

a. Compute the amount of overhead to be allocated to each product under activity-based costing. (Do not round intermediate calculations.)

b. Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.2 for pencils and 0.1 for pens and that 40,000 boxes of pencils and 65,000 boxes of pens were produced during the period. (Do not round intermediate calculations.)

Solutions

Expert Solution

a. Activity-based costing:

Overhead allocated
Pencils 70000
Pens 110500

Working:

Activity Pool Total cost Activity Driver Pencils Pens
Driver Units Cost/unit Units Cost allocated Units Cost allocated
Setting Up 98000 Number of setups 49 2000 19 38000 30 60000
Inspecting 30000 Number of parts 10 3000 4 12000 6 18000
Packing and shipping 52500 Number of bixes shipped 105000 0.5 40000 20000 65000 32500
Total Overhead 180500 70000 110500

b. Direct labor-hour based allocation

Overhead allocated
Pencils 99586
Pens 80914

Working:

Pencils Pens
Overhead rate per direct labor hour *    12.45         12.45
Production 8000 6500
Overhead allocated 99586 80914
Pencils Pens Total
Direct labor hours per unit 0.2 0.1
Total production 40000 65000
Total Direct labor hours 8000 6500 14500
Total overheads 180500
Overhead rate per direct labor hour *         12.45

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