Question

Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost		Expected Activity
Machining	Machine-hours	$	209,000	10,000	MHs
Machine setups	Number of setups	$	171,100	290	setups
Production design	Number of products	$	93,000	2	products
General factory	Direct labor-hours	$	259,000	12,000	DLHs

Activity Measure	Product Y	Product Z
Machine-hours	7,900	2,100
Number of setups	50	240
Number of products	1	1
Direct labor-hours	8,900	3,100
Question: Using the ABC system, what percentage of the Machining costs is assigned to Product Y and Product Z?

Answer 1

	product Y	Product Z	Total
Machining cost assigned	$                 29,500.00	$     141,600.00	$ 171,100.00
% of machine cost	17.24%	82.76%	100.00%

Working notes

Calculation of Activity rates
Activity Cost Pool	Activity Measure	Estimated Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machining	Machine-hours	$   209,000.00	10,000	$                20.90	Per MHs
Machine setups	Number of setups	$   171,100.00	290	$              590.00	Per setups
Production design	Number of products	$     93,000.00	2	$        46,500.00	Per products
General factory	Direct labor-hours	$   259,000.00	12,000	$                21.58	Per DLHs
Total		$     732,100.00

Cost assigned to Product Y
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machining	$                         20.90	7900	$        165,110.00
Machine setups	$                       590.00	50	$           29,500.00
Production design	$                 46,500.00	1	$           46,500.00
General factory	$                         21.58	8900	$        192,091.67
Total Overheads assigned			$        433,201.67

Cost assigned to Product Z
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machining	$                         20.90	2100	$           43,890.00
Machine setups	$                       590.00	240	$        141,600.00
Production design	$                46,500.00	1	$           46,500.00
General factory	$                         21.58	3100	$           66,908.33
Total Overheads assigned			$        298,898.33