Question

In: Accounting

Copy of Riley's Land Management Company has $27,000 in indirect costs operating her company. She has...

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?

Solutions

Expert Solution

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


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