Question

College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center.

Activity	Recommended Cost Driver	Estimated Cost			Estimated Cost Driver Units
Setting up production	Number of production runs	$	36,000		120	runs
Processing orders	Number of orders		46,800		180	orders
Handling materials	Pounds of materials		14,000		7,000	pounds
Using machines	Machine-hours		48,000		8,000	hours
Providing quality management	Number of inspections		48,000		40	inspections
Packing and shipping	Units shipped		40,000		20,000	units
		$	232,800

In addition, management estimated 2,000 direct labor-hours for year 5.

Assume that the following cost driver volumes occurred in February, year 5.

	Short			Medium			Tall
Number of units produced		900			600			500
Direct materials costs	$	5,000		$	2,500		$	2,000
Direct labor-hours		90			110			110
Number of orders		8			8			5
Number of production runs		1			4			9
Pounds of material		400			700			200
Machine-hours		600			400			200
Number of inspections		2			1			2
Units shipped		900			600			400

Direct labor costs were $20 per hour.

Required:

a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base.
b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement a.
c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.)

Answer 1

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Part a
Recommended by Employee:
		a	b		a/b
Activity	Recommended	Estimated	Estimated Cost		Predetermined
	Cost Driver	Cost	Driver Units		Overhead rate
Setting up production	Number of production runs	$         36,000	120	runs	$                           300
Processing orders	Number of orders	$         46,800	180	orders	$                           260
Handling materials	Pounds of materials	$         14,000	7,000	pounds	$                               2
Using machines	Machine-hours	$         48,000	8,000	hours	$                               6
Providing quality management	Number of inspections	$         48,000	40	inspections	$                       1,200
Packing and shipping	Units shipped	$         40,000	20,000	units	$                               2
Total		$       232,800
Based on Direct Labor hours:
Estimated Overhead	a	$       232,800
Estimated Direct Labor Hours	b	2,000
Predetermined Overhead rate	a/b	$         116.40
Part b
		Short	Medium	Tall
Direct materials costs		$            5,000	$                       2,500	$               2,000
Direct labor cost	$20*Direct labor hours	$            1,800	$                       2,200	$               2,200
Overhead	$116.40* Direct labor hours	$         10,476	$                     12,804	$             12,804
Product Cost		$         17,276	$                     17,504	$             17,004
Part c
		Short	Medium	Tall
Direct materials costs		$            5,000	$                       2,500	$               2,000
Direct labor cost	$20*Direct labor hours	$            1,800	$                       2,200	$               2,200
Overhead		$         10,980	$                       9,480	$               8,800
Product Cost		$         17,780	$                     14,180	$             13,000
Activity	Predetermined	Short		Medium		Tall
	Overhead rate	Activity	Overhead	Activity	Overhead	Activity	Overhead
Setting up production	$                                                       300	1	$                           300	4	$                       1,200	9	$         2,700
Processing orders	$                                                       260	8	$                       2,080	8	$                       2,080	5	$         1,300
Handling materials	$                                                            2	400	$                           800	700	$                       1,400	200	$            400
Using machines	$                                                            6	600	$                       3,600	400	$                       2,400	200	$         1,200
Providing quality management	$                                                   1,200	2	$                       2,400	1	$                       1,200	2	$         2,400
Packing and shipping	$                                                            2	900	$                       1,800	600	$                       1,200	400	$            800
Total			$                     10,980		$                       9,480		$         8,800