Question

Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labour-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:

Activity Cost Pool       Activity Measure        Estimated Overhead Cost      Expected Activity

Machining             Machine-hours        $ 200,000                       10,000 MHs

Machine setups Number of setups       $100,000               200 setups

Production design Number of products     $84,000               2 products

General factory Direct labour-hours         $300,000             12,000 DLHs

Activity Measure        Product Y        Product Z

Machining                       7,000              3,000

Number of setups                50              150

Number of products              1               1

Direct labour-hours        8,000             4,000

Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Z for the Machine Setups Activity?

A) $25,000

B) $66,667

C) $75,000

D) $100,000

E) $50,000

Enter only the letter of the correct response in the space below (i.e. A, B, C, D, or E).

Answer 1

Estimated Overhead Cost for Machine setups = 100,000

Number of setups = 200

Machine setups activity rate = Estimated Overhead Cost for Machine setups/Number of setups

= 100,000/200

= $500 per setup

Number of setups used by product Z = 150

Machine setups cost allocated to product Z = Number of setups used by product Z x Machine setups activity rate

= 150 x 500

= $75,000

Total manufacturing overhead cost assigned to Product Z for the Machine Setups Activity = $75,000

Correct option is (C)