Question

Swifty Co. incurs $533000 of overhead costs each year in its three main departments, setup ($45000), machining ($405000), and packing ($83000). The setup department performs 60 setups per year, the machining department works 8000 hours per year, and the packing department packs 200 orders per year. Information about Swifty’s 2 products is as follows:

	Product One	Product Two
Number of setups	10	50
Machining hours	2800	5200
Orders packed	120	80

Using ABC, how much overhead is assigned to Product One each year?

$533000

$333950

$266500

$199050

Answer 1

Activity cost pool	Activity measure	Estimated overhead cost	Expected activity	Activity rate	Activity used by product One	Overhead allocated to product One
Machining	Machine hours	405,000	8,000 MHs	405,000/8,000 = 50.625 per MH	2,800	2,800 x 50.625 = 141,750
setups	Number of setups	45,000	60 setups	45,000/60 = 750 per setup	10	10 x 750 = 7,500
Packing	Number of orders	83,000	200 orders	83,000/200 = 415 per order	120	120 x 415 = 49,800
Total		$533,000				$199,050

Overhead allocated to product One = $199,050

Fourth option is correct.