Question

Musich Corporation has an activity-based costing system with three activity cost pools--Machining, Setting Up, and Other. The company's overhead costs, which consist of equipment depreciation and indirect labor, have been allocated to the cost pools already and are provided in the table below.

	Activity Cost Pools
	Machining		Setting Up		Other		Total
Equipment depreciation	$	11,000	$	52,700	$	25,400	$	89,100
Indirect labor		6,900		3,700		4,900		15,500
Total	$	17,900	$	56,400	$	30,300	$	104,600

Costs in the Machining 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 appear below:

	MHs	Batches
Product Z3	6,800	1,150
Product T1	7,000	1,750
Total	13,800	2,900

	Product Z3		Product T1
Sales (total)	$	246,800	$	263,500
Direct materials (total)	$	88,000	$	99,200
Direct labor (total)	$	111,600	$	109,200

Required:

a. Calculate activity rates for each activity cost pool using activity-based costing.

b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

c. Determine the product margins for each product using activity-based costing.

Answer 1

a.calculation of activity rate for each cost pool:

activity rate = total cost of activity / total activity

machining ($17,900/13,800)	$1.30
setting up ($56,400/2,900)	$19.45

b.assigning overhead cost to each product using ABC.

	product Z3	Product T1
machining ($1.30*6,800 ,7,000 MHS)	8,840	9,100
setting up ($19.45*1150, 1750 batches)	22,36750	34,037.50
total overhead assigned	31,207.50	43,137.50

c.product margin using ABC.

	product Z3	product T1
sales	246,800	263,500
less:direct materials	(88,000)	(99,200)
less:direct labour	(111,600)	(109,200)
less:overhead assigned	(31,207.50)	(43,137.50)
product margin	15,992.50	11,962.50