Question

Adelberg Company has two products: A and B. The annual production and sales of Product A is 1,800 units and of Product B is 1,200 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.5 direct labor-hours per unit and Product B requires 0.8 direct labor-hours per unit. The total estimated overhead for next period is $99,975.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and Order Size--with estimated overhead costs and expected activity as follows:

	Estimated		Expected Activity
Activity Cost Pools	Overhead Costs		Product A	Product B	Total
Activity 1	$	30,892	1,100	700	1,800
Activity 2		17,596	1,800	300	2,100
Order Size		51,487	900	960	1,860
Total	$	99,975

(Note: The Order Size activity cost pool's costs are allocated on the basis of direct labor-hours.)

The predetermined overhead rate under the traditional costing system is closest to:

Answer 1

Answer- The predetermined overhead rate under the traditional costing system is closest to = $53.75 per hour.

Explanation- Predetermined overhead rate for manufacturing overhead = Total estimated manufacturing overhead/ Budgeted direct labor hours

= $99975/1860 direct labor hour

= $53.75 per hour

Where- Budgeted direct labor hours = (1800 units*0.5 direct labor hours per unit)+ (1200 units*0.8 direct labor hours per unit)

= 900 hours+ 960 hours

= 1860 direct labor hours