Question

Q: Philips Company manufactures a variety of high- and low-volume products, including product 456, in its Westchester Plant. The following information pertains to the most recent year:

	Total for product 456	Total for Westchester
Unit-level overhead		$200,000
Batch-level overhead		300,000
Product-level overhead		500,000
Plant-level overhead		400,000
Total overhead		$1,400,000
Units produced	100	5,000
Direct labor hours	200	20,000
Machine hours	90	10,000
Setups	6	120
Setup hours	30	500
Design changes	4	40
Design hours	280	4,000

REQUIRED:

(1) If the Westchester Plant accumulates all overhead in a single cost pool and allocates it on the basis of machine hours, how much overhead cost will be allocated to a unit of Product 456?

(2) If the Westchester Plant uses ABC with setups as the driver for all batch-level overhead, design hours as the driver for all product-level overhead, and machine hours as the driver for all unit- and plant-level overhead, how much overhead cost will be allocated to a unit of Product 456?

Answer 1

1. Overhead cost allocated to a unit of Product 456 = Overhead rate * machine hours used

= 140 per machine hour * 90 machine hours

= $ 12,600

Overhead rate = Total overhead cost / Total Machine hours

=  1,400,000 / 10,000

= $ 140 per machine hour

2. Overhead cost allocated to a unit of Product 456 will be $ 55,400

	Activity Rate	Activity by Product 456	Cost allocated
Unit-level overhead	20 per Machine hour	90	$               1,800
Batch-level overhead	2500 per setup	6	$            15,000
Product-level overhead	125 per Design hr	280	$            35,000
Plant-level overhead	40 per Machine hour	90	$               3,600
			$            55,400

Activity	Activity Driver	Activity Overhead (A)	Cost Driver quantity (B)	Activity rate for each pool (A/B)
Unit-level overhead	Machine hours	$                  200,000	10,000.00	20 per Machine hour
Batch-level overhead	Setups	$                  300,000	120.00	2500 per setup
Product-level overhead	Design hours	$                  500,000	4,000.00	125 per Design hr
Plant-level overhead	Machine hours	$                  400,000	10,000.00	40 per Machine hour