Question

1. The Alpha Company produces two products, A and B. The quantities produced in a recent period were 2,000 A's and 8,000 B's. Product A is a large specialty product that is produced in small batches. Product B is a smaller product that is produced in somewhat larger batches. Activity cost pools and activity measurements for stage two calculations are presented below.

Activity	Cost of Activity	Cost Drivers	Quantity used by product A	Quantity used by product B
Machining Receiving & storing Set-ups Total	$100,000 60,000 40,000 $200,000	Number of machine hours Number of purchase orders Number of set-ups	16,000 100 15	24,000 200 35

Required:

Calculate the cost drivers’ rate for each of the four Activities above and allocate the overhead costs to:

Product A and

Product B.

Answer 1

Activity	Cost of activity (A)	Total units (B)	Cost driver rate
Machining	$100,000	40,000 M-hrs	$2.5 per M-hr
Receiving & storing	$60,000	300 orders	$200 per order
Set-ups	$40,000	50 set-ups	$800 per set-up

Allocation of overhead cost to Product A

Activity	Cost driver rate	Quantity	Costs
Machining	$2.5 per M-he	16,000 M-hrs	$40,000
Receiving & storing	$200 per order	100 orders	$20,000
Set-ups	$800 per set-up	15 set-ups	$12,000
Total			$72,000

So, cost per unit of Product A = $72,000 / 2,000 = $36 per unit

Allocation of overhead cost to Product B

Activity	Cost driver rate	Quantity	Costs
Machining	$2.5 per M-he	24,000 M-hrs	$60,000
Receiving & storing	$200 per order	200 orders	$40,000
Set-ups	$800 per set-up	35 set-ups	$28,000
Total			$128,000

So, cost per unit of Product B = $128,000 / 8,000 = $16 per unit