In: Accounting
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 | 900 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) |
350 |
200 |
? |
900 |
Gas (gallons) |
130 |
? |
60 |
400 |
Invoices (invoices) |
? |
50 |
50 |
250 |
If Riley allocates indirect costs to each division using the three cost pool above and three allocation rates how much cost will each division be assigned per gallon of gas used in that division? (In other words, what would be the allocation rate used to assign costs that are driven by the gallons of gas used?)
Rate |
Usage |
Cost of gas assigned |
|
Lawn |
$ 4.50 |
130 |
$ 585.00 |
Bush |
$ 4.50 |
210 |
$ 945.00 |
Plowing |
$ 4.50 |
60 |
$ 270.00 |
400 |
$ 1,800.00 |
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 |
900 |
$ 26.67 |
Per Hours |
Gas |
Number of Gallons of gas |
$ 1,800.00 |
400 |
$ 4.50 |
Per Gallons of gas |
Invoices |
Number of invoices |
$ 1,200.00 |
250 |
$ 4.80 |
Per invoices |