Question

Rusties Company recently implemented an activity-based costing system. At the beginning of the year, management made the following estimates of cost and activity in the company’s five activity cost pools:
Activity Cost Pool Activity Measure Expected Overhead Cost Expected Activity
Labor-related Direct labor-hours $16,380 1,260 DLHs
Purchase orders Number of orders $1,920 640 orders
Product testing Number of tests $4,275 285 tests
Template etching Number of templates $805 35 templates
General factory Machine-hours $42,600 7,100 MHs

Required:
Compute the activity rate for each of the activity cost pools.

Answer 1

Answer:

a.  Labor Cost Rate=   13 $ per DLH

b.  Purchase orders Rate= $ 3 per order

c. Product testing Rate =   $ 15 per test

d. Template etching Rate = $ 23 per template

e. General factory Rate=   $ 6 per MHs

Explanation:

Data

Activity            Activity                Expected Overhead       Expected

Cost Pool      Measure                  Cost                              Activity

Labor-related Direct labor-hours $16,380                 1,260 DLHs

Purchase orders Number of orders $1,920                 640 orders

Product testing Number of tests    $4,275                285 tests

Template etching Number of templates $805          35 templates

General factory Machine-hours          $42,600            7,100 MHs

The activity rate can be obtained by dividing the  total cost of each activity with the total cost of the driver allocated to it.

Calculations

Activity Rate = Expected Overhead Cost/ Expected Activity

a.  Labor Cost Rate=   $16,380   /  1,260 DLHs=  13 $ per DLH

b.  Purchase orders Rate=  $1,920/  640 orders= $ 3 per order

c. Product testing Rate =  $4,275 /285 tests= $ 15 per test

d. Template etching Rate = $805 /35 templates= $ 23 per template

e. General factory Rate=  $42,600/ 7,100 MHs= $ 6 per MHs