Question

In: Accounting

Groleau Corporation has an activity-based costing system with three activity cost pools--Processing, Setting Up, and Other....

Groleau Corporation has an activity-based costing system with three activity cost pools--Processing, Setting Up, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products and the company's costs and activity-based costing system appear below:

Factory utilities (total) $ 35,500
Indirect labor (total) $ 15,200

Distribution of Resource Consumption Across Activity Cost Pools

Processing Setting Up Other
Factory utilities 0.40 0.10 0.50
Indirect labor 0.40 0.40 0.20
MHs Batches
Product S8 3,000 1,100
Product F1 7,700 1,000
Total 10,700 2,100
Product S8 Product F1
Sales (total) $ 70,300 $ 98,800
Direct materials (total) $ 23,700 $ 34,800
Direct labor (total) $ 34,100 $ 43,300

Required:

a. Assign overhead costs to activity cost pools using activity-based costing.

b. Calculate activity rates for each activity cost pool using activity-based costing.

c. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

d. Determine the product margins for each product using activity-based costing.

Solutions

Expert Solution

Answer:

(a) Overhead costs to activity cost pools

Total Processing costs = [(Factory Utilities overheads * 0.4) + (Indirect Labor Overheads * 0.4)]

                                  = [($35,500 * 0.4) + ($15,200 * 0.4)]

                                  = $14,200 + $6,080

                                 = $20,280

Total Setting Up costs = [(Factory Utilities overheads * 0.1) + (Indirect Labor Overheads * 0.4)]

                                  = [($35,500 * 0.) + ($15,200 * 0.4)]

                                  = $3,550 + $6,080

                                 = $9,630

(b) Activity rates for each activity cost pool

Processing costs rate = Total Processing costs / Total Machine hours = $20,280 / 10,700 = $1.895 per machine hour

Setting Up costs rate = Total Setting up costs / Total Batches = $9,630 / 2,100 = $4.585 per batch

(c) Amount of overhead cost that would be assigned to each product using ABC

Processing costs allocated to Product S8

= Total no. of machine hours * Processing costs rate per machine hour = 3,000 * 1.895 = $5,686

Setting up costs allocated to Product S8

= Total no. of batches * Setting Up costs rate per batch = 1,100 * 4.585 = $5,044

Total Overhead costs allocated to Product S8 = $5,686 + $5,044 = $10.730

Processing costs allocated to Product F1

= Total no. of machine hours * Processing costs rate per machine hour = 7,700 * 1.895 = $14,594

Setting up costs allocated to Product F1

= Total no. of batches * Setting Up costs rate per batch = 1,000 * 4.585 = $4,586

Total Overhead costs allocated to Product F1 = $14,594 + $4,586 = $19,180

(d) Product margins for each product using activity-based costing

Product S8 Product F1
A Sales $70,300 $98,800
Costs:
Direct Materials        23,700        34,800
Direct Labor        34,100        43,300
Processing costs allocated           5,686        14,594
Setting up costs allocated           5,044           4,586
B Total Cost         68,530         97,280
Product Margin (A-B)            1,770            1,520

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