Question

Aresco Corporation manufactures two products: Product G51B and Product E48X. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products G51B and E48X.

	Activity Cost Pool	Activity Measure	Total Cost	Total Activity
	Machining	Machine-hours	$100,000	5,000	MHs
	Machine setups	Number of setups	$300,000	500	setups
	Product design	Number of products	$80,000	2	products
	General factory	Direct labor-hours	$350,000	10,000	DLHs

	Activity Measure	Product G51B	Product E48X
	Machine-hours	2,000	3,000
	Number of setups	270	230
	Number of products	1	1
	Direct labor-hours	3,000	7,000

Required:

1. Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product G51B?

2. Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product E48X?

3. Using the ABC system, what percentage of the total overhead cost is assigned to Product G51B?

4. Using the ABC system, what percentage of the total overhead cost is assigned to Product E48X?

5. Why would a company want to implement ABC instead of using a plantwide overhead rate?

Answer 1