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Exercise 3-5 Assigning Overhead to Products in ABC [LO3-2, LO3-3] Sultan Company uses an activity-based costing...

Exercise 3-5 Assigning Overhead to Products in ABC [LO3-2, LO3-3]

Sultan Company uses an activity-based costing system.
        At the beginning of the year, the company made the following estimates of cost and activity for its five activity cost pools:

   

  Activity Cost Pool

   Activity
Measure
 Expected
Overhead Cost		        Expected
        Activity
  Labor-related   Direct labor-hours $ 231,600    38,600 DLHs
  Purchase orders   Number of orders $ 15,015    231 orders
  Parts management
   Number of part types $ 95,200    112 part types
  Board etching   Number of boards $ 106,800    1,780 boards
  General factory   Machine-hours $ 184,500    20,500 MHs

    

Required:
1.

Compute the activity rate for each of the activity cost pools.

  

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Activity Cost Pool Activity Rate
Labor-related per DLH
Purchase orders per order
Parts management per part type
Board etching per board
General factory per MH

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2. The expected activity for the year was distributed among the company’s four products as follows:

  

Expected Activity
  Activity Cost Pool Product A Product B Product C Product D
  Labor-related (DLHs) 4,500     26,600    3,500     4,000   
  Purchase orders (orders) 70     37    32     92   
  Parts management (part types) 32     19    48     13   
  Board etching (boards) 360     790    630     0   
  General factory (MHs) 4,000     7,700    2,800     6,000   

  

Using the ABC data, determine the total amount of overhead cost assigned to each product.

  

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Overhead Cost Assigned
Activity Cost Pool Product A Product B Product C Product D
Labor-related (DLHs)
Purchase orders (orders)
Parts management (part types)
Board etching (boards)
General factory (MHs)
Total

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Homework Answers

Answer #1

1) Calculation of Activity Rate

Activity Cost Pool Calculation Activity Rate
Labor Related $231600/38600 $6 per Labor Hour
Purchase order cost $15015/231 $65 per order
Parts Management Cost $95200/112 $850 per part
Board Etching $106800/1780 $60 per board
General Factory $184500/20500 $9 per machine hour

2) Total Amount of Overhead Cost assigned to each Product.

Activity Activity Rate Product A Product B Product C Product D
Labor $6 per LH $27000 $159600 $21000 $24000
Purchase order $65 per order $4550 $2405 $2080 $5980
Parts Manag. $850 per Part $27200 $16150 $40800 $11050
Board Etching $60 per Board $21600 $47400 $37800 $0
General Factory $9 Per MH $36000 $69300 $25200 $54000
Total Overhead Cost $116350 $294855 $126880 $95030
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