Question

The controller for Vitrina Inc. has established the following activity cost pools and cost drivers.

                                        Budgeted               Budgeted

                                        Overhead               Level for

Activity Cost Pool Cost    Cost Driver            Cost Driver

Machine setups                 $200,000                Number of setups         160

Material handling               100,000                Weight of material   50,000 kilograms

Waste control                        50,000                Weight of chemicals          10,000 kilograms

Quality control                       75,000                Number of inspections 300

Other overhead costs        200,000                Machine hours        20,000

Each order must be a minimum of 1,000 boxes of film chemicals.

The production requirements for each minimum order are as follows:

Machine setups                 5 setups

Material handling               1,500 kilograms

Waste Control                   200 kilograms

Quality Control                  5 inspections

Other Overhead Costs      500 machine hours

         

Required:

1 Calculate the overhead that should be assigned to each minimum order of film chemicals using the above data.

2 Calculate the overhead that should be assigned to each minimum order of film chemicals if Vitrina decides to use a single predetermined overhead rate based on machine hours.

Answer 1

Solution 1:

Determination of activity rate for each activity & computation of overhead assigned to each minimum order of film chemical
Activity Cost Pool	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Overhead assigned to each minimum order
					Usage	Allocated Costs
Machine Setups	$200,000.00	Nos of setups	160	$1,250.00	5	$6,250.00
Material handling	$100,000.00	Weight of material	50000	$2.00	1500	$3,000.00
Waste Control	$50,000.00	Weight of chemical	10000	$5.00	200	$1,000.00
Quality control	75000.00	Nos of inspections	300	$250.00	5	$1,250.00
Other overhead cost	$200,000.00	Machine hours	20000	$10.00	500	$5,000.00
Total	$625,000.00					$16,500.00

Solution 2:

Predetermined overhead rate on the basis of machine hours = Budgeted overhead / Budgeted machine hours

= $625,000 / 20000 =$31.25 per machine hour

Nos of machine hour for each minimum order of film chemicals = 500 machine hours

Overhead cost assigned to each minimum order of film chemicals = 500 * $31.25 = $15,625