Question

St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.

The overhead cost allocated to Beta by using activity-based costing procedures would be:

Pool 1 Pool 2 Pool 3
Beta 1200 45 2250

Zeta 2800 55 750

Pool Cost $160,000 $280,000 $360,000

Answer 1

• All working forms part of the answer
• Working for allocation using Activity based costing

Working		Pool 1	Pool 2	Pool 3	TOTAL
A	Pool Cost	$                                 160,000.00	$                280,000.00	$                                   360,000.00	$       800,000.00
	No. of Drivers:
1	For Beta	1,200	45	2,250
2	For Zeta	2,800	55	750
B = 1+2	Total Drivers	4,000	100	3,000
C = A/B	Cost per driver	$                                           40.00	$                     2,800.00	$                                           120.00
D = C x 1	Overhead cost allocated to Beta	$                                   48,000.00	$                126,000.00	$                                   270,000.00	$       444,000.00 = ANSWER

• Answer: Overhead cost allocated to Beta = $ 444,000