7-6 Calculating traditional and ABC overhead rates (LO 2) Smith Machining makes three products. The company's annual budget includes $1,000,000 of overhead. In the past, the company allocated overhead based on expected capacity of 40,000 direct labor hours. The company recently implemented an activity-based costing system and has determined that overhead costs can be broken into four overhead pools: order processing, setups, milling, and shipping. The following is a summary of company information: Expected CostExpected ActivitiesOrder processing$   175,00010,000 ordersSetups   160,000 4,000 setupsMilling   410,00020,500 machine hoursShipping    255,00025,000 shipments $1,000,000 Requireda.Calculate the company's overhead rate based on direct labor hours.b.Calculate the company's overhead rates using the activity-based costing pools.

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Asked Feb 10, 2020
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7-6 Calculating traditional and ABC overhead rates (LO 2) Smith Machining makes three products. The company's annual budget includes $1,000,000 of overhead. In the past, the company allocated overhead based on expected capacity of 40,000 direct labor hours. The company recently implemented an activity-based costing system and has determined that overhead costs can be broken into four overhead pools: order processing, setups, milling, and shipping. The following is a summary of company information:

 
Expected Cost
Expected Activities
Order processing
$   175,000
10,000 orders
Setups
   160,000
 4,000 setups
Milling
   410,000
20,500 machine hours
Shipping
    255,000
25,000 shipments
 
$1,000,000
 
Required

a.Calculate the company's overhead rate based on direct labor hours.

b.Calculate the company's overhead rates using the activity-based costing pools.

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Expert Answer

a. Calculate the company's overhead rate based on direct labor hours.

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