Question

Howell Corporation's activity-based costing system has three activity cost pools--Machining, Setting Up, and Other. The company's overhead costs, which consist of equipment depreciation and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources.

Equipment depreciation (total)	$	27,800
Indirect labor (total)	$	7,210

Distribution of Resource Consumption Across Activity Cost Pools

	Machining	Setting Up	Other
Equipment depreciation	0.40	0.20	0.40
Indirect labor	0.30	0.30	0.40

Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products.

	MHs	Batches
Product S4	13,800	300
Product C0	5,200	1,900
Total	19,000	2,200

Additional data concerning the company's products appears below:

	Product S4			Product C0
Sales (total)	$	80,800		$	64,600
Direct materials (total)	$	22,200		$	22,100
Direct labor (total)	$	43,100		$	29,100

a. Assign overhead costs to activity cost pools using activity-based costing.

b. Calculate activity rates for each activity cost pool using activity-based costing.

c. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

d. Determine the product margins for each product using activity-based costing.

Answer 1

1) First stage allocation

	Machining	Setting up	Other	Total
Equipment depreciation	11120	5560	11120	27800
Indirect labor	2163	2163	2884	7210
Total	13283	7723	14004	35010

2) Activity rate

Machining = 13283/19000 = 0.70 per MH

Setting up = 7723/2200 = 3.51 per setup

3) Amount of overhead assigned

	Product S4	Product C0
Machining	9660	3640
Setting up	1053	6669
Total overhead	10713	10309

4) Product margin

	Product S4	Product C0
Sales revenue	80800	64600
Direct material	22200	22100
Direct labor	43100	29100
Overhead	10713	10309
Product margin	4787	3091