Question

Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data: Cost Driver Volume Activity Cost Driver Cost Pencils Pens Setting up Number of setups $ 110,000 22 33 Inspecting Number of parts 31,900 5 6 Packing and shipping Number of boxes shipped 54,000 50,000 85,000 Total overhead $ 195,900 Required: a. Compute the amount of overhead to be allocated to each product under activity-based costing. (Do not round intermediate calculations.) b. Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.1 for pencils and 0.1 for pens and that 50,000 boxes of pencils and 85,000 boxes of pens were produced during the period. (Do not round intermediate calculations.)

Answer 1

a.

Activity	Cost driver	Cost	Pencils	Pens	Overhead rate
Setting up	Number of setups	$110,000	22	33	$2,000 ($110,000/55)
Inspecting	Number of parts	$31,900	5	6	$2,900 ($31,900/11)
Packing and shipping	Number of boxes shipped	$54,000	50,000	85,000	$0.4 ($54,000/135,000)
		$195,900

Pencils = Setting up + Inspecting + Packing and shipping

= (22 * $2,000) + (5 * $2,900) + (50,000 * $0.4)

= $44,000 + $14,500 + $20,000

= $78,500

Pens = Setting up + Inspecting + Packing and shipping

= (33 * $2) + (6 * $2,900) + (85,000 * $0.4)

= $66,000 + $17,400 + $34,000

= $117,400

b. Labor hours required for pencils = 50,000 * 0.1 = 5,000

Labor hours required for pens = 85,000 * 0.1 = 8,500

Overhead allocated to pencils = $195,900 * 5,000 / (5,000 + 8,500)

= $72,556

Overhead allocated to pens = $195,900 * 8,500 / (5,000 + 8,500)

= $123,344