Question

Groleau Corporation has an activity-based costing system with three activity cost pools--Processing, Setting Up, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Costs in the Processing 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. Data concerning the two products and the company's costs and activity-based costing system appear below:

Factory utilities (total)	$	35,500
Indirect labor (total)	$	9,600

Distribution of Resource Consumption Across Activity Cost Pools

	Processing	Setting Up	Other
Factory utilities	0.40	0.50	0.10
Indirect labor	0.40	0.20	0.40

	MHs	Batches
Product S8	3,100	1,200
Product F1	7,800	1,000
Total	10,900	2,200

	Product S8			Product F1
Sales (total)	$	79,500		$	98,800
Direct materials (total)	$	26,400		$	33,500
Direct labor (total)	$	36,200		$	40,100

Required:

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

a) First stage allocation

	Processing	Setting up	Other
Factory utilities	35500*.40 = 14200	17750	3550
Indirect labor	9600*.40 = 3840	1920	3840
Total	18040	19670	7390

b) Activity rate

	Activity rate
Processing	18040/10900 = 1.66 per MH
Setting up	19670/2200 = 8.94 per setup

c) Assign overhead cost

	Product S8	Product F1
Processing	3100*1.66 = 5146	12948
Setting up	1200*8.94 = 10728	8940
Total overhead	15874	21888

d) Calculate product margin

	Product S8	Product F1
Sales	79500	98800
Direct material	26400	33500
Direct labor	36200	40100
Overhead	15874	21888
Product margin	1026	3312