Question

Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows:

Activity Pools Cost Pool Total Cost Driver
Repair and maintenance on assembly machine $82,600 Number of units produced
Programming cost 84,600 Number of programming hours
Software inspections 7,280 Number of inspections
Product testing 9,800 Number of tests
Total overhead cost $184,280

Expected activity for each product follows:

Number of Units Number of Programming Hours Number of Inspections Number of Tests
Decoder P 18,000 1,900 184 1,200
Decoder Q 41,000 1,700 76 1,600
Total 59,000 3,600 260 2,800

Required:

Compute the overhead rate for each activity pool. Determine the overhead cost allocated to each product.

Answer 1

Answer:

Repair and maintenance Overhead rate $ 1.4 per unit produced

Programming Overhead Rate $ 23.5 per programming hour

Software inspections Overhead Rate  $ 30.08 per  inspection

Product testing Overhead Rate$ 3.5 per test

Cost Allocated To Decoder P= $ 79 584. 72

Cost Allocated To Decoder Q = $155636.08

Explanation:

Activity Pools Cost Pool Total Cost Driver

Repair and maintenance on assembly machine $82,600 Number of units produced

Programming cost 84,600 Number of programming hours

Software inspections 7,280 Number of inspections

Product testing 9,800 Number of tests

Total overhead cost $184,280

Expected activity for each product follows:

Number of           Number of                         Number of                 Number

Units                      Programming  Hours       Inspections                of Tests

Decoder P 18,000            1,900                     184                         1,200

Decoder Q 41,000            1,700                    76                             1,600

Total 59,000                    3,600                      260                        2,800

Overhead Rates

Repair and maintenance Overhead rate= Repair and maintenance / Number of units produced =$82,600/59000= $ 1.4 per unit produced

Programming Overhead Rate=Programming cost/Number of programming hours =84,600/  3,600  = $ 23.5 per programming hour

Software inspections Overhead Rate=Software inspections / Number of inspections =7,280/260  = $ 30.08 per  inspection

Product testing Overhead Rate=Product testing /Number of tests  =9,800 / 2,800=  $ 3.5 per test

Cost Allocated To Decoder P = 18000* 1.4 + 23.5 * 1900 + 30.08 * 184+ 3.5*1200

Cost Allocated To Decoder P= $ 25,200 + $ 44650+ $5534.72+ $  4200

Cost Allocated To Decoder P= $ 79 584. 72

Cost Allocated To Decoder Q = 41000* 1.4 + 23.5 * 1700 + 30.08 * 76+ 3.5*1600

Cost Allocated To Decoder Q = $ 57400+ $ 39950+ $ 2286.08+ $ 56000

Cost Allocated To Decoder Q = $155636.08