Question

derro company has identified the following overhead activities and calculated the following application rates:

Activity

Cleaning equipment $100/batch

Purchasing ingredient $50/purchase

Advertising $500/Advertisement

Renting factory space $1000/flavor

a. What level of overhead is each of these overhead activities?

b. How much overhead would a new flavour receive if it were made in five batches, required 20 Purchases, and advertised twice?

c. if penalty of the factory space is available for the production of more ice cream flavors, will the company likely choose too many or too few?

Answer 1

a) The level of overhead for each of the given activity is shown as follows:-

Activities	Category	Reason
Cleaning Equipment	Batch-level activities	Costs are incurred for a group of units (or batch).
Purchasing Ingredient	Unit-level activities	Cost is incurred when an unit is purchased.
Advertising	Product-line activities	The cost is based on product line
Renting Factory Space	Facility support activities	The cost is administrative in nature

b) Total Overhead Cost = Cleaning equipment+Purchasing ingredient+Advertising+Renting

= (5 batches*$100)+(20 purchases*$50)+(2 ads*$500)+(1 flavor*$1,000)

= $500+$1,000+$1,000+$1,000 = $3,500

c) If penalty of the factory space is available for the production of more ice cream flavors, then the company will likely choose too many flavors.