Question

Calculating Activity-Based Costing Overhead Rates

Assume that manufacturing overhead for Goldratt Company consisted of the following activities and costs:

Setup (1,000 setup hours)	$150,000
Production scheduling (400 batches)	80,000
Production engineering (60 change orders)	60,000
Supervision (2,000 direct labor hours)	66,000
Machine maintenance (12,000 machine hours)	48,000
Total activity costs	$404,000

The following additional data were provided for Job 845:

Direct materials costs	$7,000
Direct labor cost (5 Milling direct labor hours;35 Finishing direct labor hours)	$1,000
Setup hours	5 hours
Production scheduling	1 batch
Machine hours used (25 Milling machine hours;5 Finishing machine hours)	30 hours
Production engineering	3 change orders

(a) Calculate the cost per unit of activity driver for each activity cost category.
Setup
$Answer

Production scheduling
$Answer
Production engineering
$Answer
Supervision
$Answer
Machine maintenance
$Answer

(b) Calculate the cost of Job 845 using ABC to assign the overhead costs.
$Answer

(c) Calculate the cost of Job 845 using the plantwide overhead rate based on machine hours. (Round your answer to the nearest dollar.)
$Answer

(d) Calculate the cost of Job 845 using a machine hour departmental overhead rate for the Milling Department ($27 per hour) and a direct hour overhead rate for the Finishing Department ($97 per hour). (Round your answer to the nearest dollar.)  
$Answer

Answer 1

Solution a:

Computation of Activity rates
Activity cost pool	Overhead costs	Cost drivers	Activity Rate
Setup	$1,50,000	1000	$150.00	per setup hour
Production scheduling	$80,000	400	$200.00	per batch
Production engineering	$60,000	60	$1,000.00	per change order
Supervision	$66,000	2000	$33.00	per DLH
Machine maintenance	$48,000	12000	$4.00	per Machine hour

Solution b:

Computation of Overhead assigned to Job 845
Activity	Activity Rate	Cost Driver used	Overhead Allocated
Setup	$150.00	5	$750
Production scheduling	$200.00	1	$200
Production engineering	$1,000.00	3	$3,000
Supervision	$33.00	40	$1,320
Machine maintenance	$4.00	30	$120
Total Cost assigned			$5,390
Computation of Cost of Job 845 (Using ABC)
Direct material cost	$7,000
Direct labor cost	$1,000
Overhead assigned	$5,390
Total Cost of Job 845	$13,390

Solution c:

Computation of Cost of Job 845 (Using Plantwide rate)
Direct material cost	$7,000
Direct labor cost	$1,000
Overhead assigned ($404000/12000*30)	$1,010
Total Cost of Job 845	$9,010

Solution d:

Computation of Cost of Job 845 (Using Departmental rate)
Direct material cost	$7,000
Direct labor cost	$1,000
Overhead assigned ($27*25 + $97*5))	$1,160
Total Cost of Job 845	$9,160