Question

Copy of Riley's Land Management Company has $27,000 in indirect costs operating her company. She has identified three activities that drive these indirect cost and created three related cost pools as detailed below:

Activities	Costs	Cost-drivers
Labor Hours	$24,000	1000 hours
Gas	$1,800	400 gallons
Invoices	$1,200	250 invoices
Total costs	$27,000

Riley has three divisions. Each division uses different amount of the cost driving activities as described below.

Department	Lawn	Bush	Plowing	Total
Labor hours (hours)	340	200	?	1000
Gas (gallons)	160	?	40	400
Invoices (invoices)	?	50	40	250

If Riley allocates indirect costs to each division using the three cost pools above and three allocation rates how much cost will each division be assigned per labor hour worked in that division? (In other words, what would be the allocation rate used to assign costs that are driven by the number of labor hours?

Answer 1

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost	Expected Activity (B)	Activity rate (A/B)
Labor hours	Number of Hours	$    24,000.00	1,000	$               24.00	Per Hours
Gas	Number of Gallons of gas	$      1,800.00	400	$                 4.50	Per Gallons of gas
Invoicing	Number of Invoices	$      1,200.00	250	$                 4.80	Per Invoices

Cost assigned to Department Lawn
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Labor hours	$          24.00	340	$         8,160.00
Gas	$            4.50	160	$            720.00
Invoicing	$            4.80	160	$            768.00
Total Overheads assigned			$         9,648.00

Cost assigned to Department Bush
	Activity rate(A)	Activity Driver Incurred (B)	Overhead Assigned (C=A*B)
Labor hours	$                 24.00	200	$       4,800.00
Gas	$                    4.50	200	$          900.00
Invoicing	$                    4.80	50	$          240.00
Total Overheads assigned			$       5,940.00

Cost assigned to Department Plawing
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Labor hours	$          24.00	460	$      11,040.00
Gas	$            4.50	40	$           180.00
Invoicing	$            4.80	40	$            192.00
Total Overheads assigned			$      11,412.00

Department	Lawn	Bush	Plowing	Total
Labor hours (hours)	340	200	460	1000
Gas (gallons)	160	200	40	400
Invoices (invoices)	160	50	40	250