In: Accounting
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.)
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 |