Question

Bangor Company makes products C and D. Information for overhead costs and for the two products appears below. The company makes 50,000 units of product C each year and 20,000 units of product D. Activity Driver Total Overhead Cost Prod C Usage Prod D usage Setups # of setups $200,000 500 setups 1,500 setups Ordering parts # of parts $300,000 60,000 parts 40,000 parts Machining MH $600,000 12,000 MH 6,000 MH Inspections # of Insp $400,000 10,000 Insp 40,000 Insp Shipping # of shipments $300,000 10,000 Ship 10,000 Ship Total overhead $1,800,000 * MH – Machine Hours Insp – Inspections Ship - Shipments Assume that activity based costing is used, with each activity in its own cost pool. What is the rate per setup that should be used to assign set up cost to product D?

Answer 1

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost	Expected Activity (B)	Activity rate (A/B)
Setup	Number of Setup	$ 2,00,000.00	2,000	$ 100.00	Per Setup
Ordering parts	Number of Parts	$ 3,00,000.00	100000	$      3.00	Per Parts
Machining	Number of Machine hours	$ 6,00,000.00	18000	$   33.33	Per Machine hours
Inspection	Number of Inspections	$ 4,00,000.00	50000	$      8.00	Per Inspections
Shipping	Number of Shipments	$ 3,00,000.00	20000	$   15.00	Per Shipments
Total		$18,00,000.00

Rate of setup = $100 per setup