Question

Orear Corporation manufactures two products: Product Z34D and Product J25M. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Z34D and J25M.
Activity Cost Pool Activity Measure Total Cost Total Activity
Machining Machine-hours $ 120,000 6,000 MHs
Machine setups Number of setups $ 90,000 150 setups
Product design Number of products $ 84,000 2 products
General factory Direct labor-hours $ 300,000 10,000 DLHs
Activity Measure Product Z34D Product J25M
Machine-hours 4,000 2,000
Number of setups 90 60
Number of products 1 1
Direct labor-hours 7,000 3,000
Required:
1. Using the plantwide overhead rate, the percentage of the total overhead cost that is allocated to Product J25M is closest to ___________.

Answer 1

Answer:

30%

Explanation:

For computing the percentage of the total overhead cost we need to find first plantwide overhead rate and Product J25M (absorbed overhead) which is shown below:-

Plantwide overhead rate = Total plant overhead ÷ Total number of labor hours

= ($120,000 + $90,000 + $84,000 + $300,000) ÷ (7,000 + 3,000)

= $594,000 ÷ 10,000

= 59.4 per labor hour

Product J25M (absorbed overhead) = Plantwide overhead rate × Direct labor hours of Product J25M

= $59.4 × 3,000

= $178,200

So, the Percentage of the total overhead cost = Product J25M (absorbed overhead) ÷ Total plant overhead × 100

= $178,200 ÷ $594,200 × 100

= 30%