Question

After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Rey found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.

Activity	Cost		Driver
Setting up machines	$	19,780	23 batches
Inspecting components	$	5,600	5,600 parts
Providing utilities	$	11,000	5,500 machine hours

Overhead has been applied to output at a rate of 55% of direct labor costs. The following data pertain to Job 6.15.

Direct materials	$	2,400		Number of parts	390 parts
Direct labor	$	3,500		Machine hours	560 machine hours
Batches	3 batches

Required:

1.	What is the total cost of Job 6.15 if Business Solutions applies overhead at 55% of direct labor cost? (Omit the "$" sign in your response.)

Total cost

$

2.	What is the total cost of Job 6.15 if Business Solutions uses activity-based costing? (Do not round your intermediate calculations. Omit the "$" sign in your response.)

Total cost

$

Answer 1

1. Total Cost = Direct Materials + Direct Labor + Overhead

= $ 2,400 +$ 3,500 + (55% *$ 3,500)

= $ 7,825

Hence the correct answer is 7,825

2.

The correct answer is 9,990

Note :

1. Total Cost = Direct Materials + Direct Labor + Overhead

= $ 2,400 +$ 3,500 + $4,090

= $ 9,990

2.Overhead:

Activity	Cost		Driver	Activity Rate ( Cost / Total Drivers)	Activity	Cost Allocated ( Activity rate * Activity)
Setting up machines	$	19,780	23 batches	860.00	3	2,580.0
Inspecting components	$	5,600	5,600 parts	1.00	390	390.0
Providing utilities	$	11,000	5,500 machine hours	2.00	560	1,120.0
						4,090.0