Chris Anderson has been studying his department’s profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company’s approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,141,500 is based on 45,660 machine hours. In an initial analysis of overhead costs, Chris has identified the following activity cost pools. Cost Pool Expected Cost Expected Activities Product assembly $ 780,000 39,000 machine hours Machine setup and calibration 270,000 4,500 setups Product inspection 54,000 1,350 batches Raw materials storage 37,500 250,000 pounds $ 1,141,500 Chris Anderson is taking the next step in his exploration of activity-based costing and wants to examine the overhead costs that would be allocated to two of the department’s four products. He has gathered the following budget information about each product. Driver Usage Component 3F5 Component T76 Machine hours 1,000 11,000 Setups 44 20 Batches 20 15 Pounds of raw materials 10,000 10,000 (a) Calculate the total overhead allocated to each component under the traditional method using machine hours as the overhead application base. (b) Calculate the total overhead allocated to each component under activity-based costing. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 0 decimal places, e.g. 5,275.)

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 15E: Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing...

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Chris Anderson has been studying his department’s profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company’s approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,141,500 is based on 45,660 machine hours. In an initial analysis of overhead costs, Chris has identified the following activity cost pools.

Cost Pool	Expected Cost	Expected Activities
Product assembly		$	780,000	39,000	machine hours
Machine setup and calibration			270,000	4,500	setups
Product inspection			54,000	1,350	batches
Raw materials storage			37,500	250,000	pounds
		$	1,141,500

Chris Anderson is taking the next step in his exploration of activity-based costing and wants to examine the overhead costs that would be allocated to two of the department’s four products. He has gathered the following budget information about each product.

Driver Usage	Component 3F5	Component T76
Machine hours	1,000		11,000
Setups	44		20
Batches	20		15
Pounds of raw materials	10,000		10,000

(a) Calculate the total overhead allocated to each component under the traditional method using machine hours as the overhead application base.

(b) Calculate the total overhead allocated to each component under activity-based costing. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 0 decimal places, e.g. 5,275.)

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