Question

College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center.

Activity	Recommended Cost Driver	Estimated Cost			Estimated Cost Driver Units
Setting up production	Number of production runs	$	36,000		120	runs
Processing orders	Number of orders		52,800		220	orders
Handling materials	Pounds of materials		14,000		7,000	pounds
Using machines	Machine-hours		48,000		8,000	hours
Providing quality management	Number of inspections		48,000		40	inspections
Packing and shipping	Units shipped		38,000		19,000	units
		$	236,800

In addition, management estimated 2,000 direct labor-hours for year 5.

Assume that the following cost driver volumes occurred in February, year 5.

	Short			Medium			Tall
Number of units produced		800			500			500
Direct materials costs	$	5,000		$	2,000		$	2,000
Direct labor-hours		110			100			120
Number of orders		9			8			4
Number of production runs		2			3			8
Pounds of material		400			800			200
Machine-hours		400			300			200
Number of inspections		3			2			1
Units shipped		800			500			400

Direct labor costs were $18 per hour.

Required:

a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base.
b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement a.
c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.)

Answer 1

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