Question

Spin Cycle Architecture uses three activity pools to apply overhead to its projects. Each activity has a cost driver used to allocate the overhead costs to the projects. The activities and related overhead costs are as follows: initial concept formation $52,960; design $420,000; and construction oversight $118,650. The cost drivers and estimated use are as follows.
Activities Cost Drivers Estimated Use of Cost Drivers per Activity
Initial concept formation Number of project changes 16
Design Square feet 140,000
Construction oversight Number of months 105

Required:
a. Compute the predetermined overhead rate for each activity.
b. Classify each of these activities as unit-level, batch-level, product-level, or facility-level.

Answer 1

Answer:

a. predetermined overhead rate for each activity

initial concept formation  = $3,310 per Project Change

design  = $3 per Square feet

construction oversight  = $1,130 per Month

b. Classification

unit-level activities :

design

batch level activities :

initial concept formation

Product level activities :

design

Facility level activities :

initial concept formation

construction oversight

Explanation:

This question requires application of Activity Based Costing (ABC) method of allocating overheads.

For each overhead a rate is determined as follows :

initial concept formation

Predetermined overhead rate = Overhead Cost / Number of Project Changes

                                                  = $52,960/ 16

                                                  = $3,310 per Project Change

design

Predetermined overhead rate = Overhead Cost / Square feet

                                                  = $420,000/ 140,000

                                                  = $3 per Square feet

construction oversight

Predetermined overhead rate = Overhead Cost / Number of Months

                                                  = $118,650/ 105

                                                  = $1,130 per Month

Classification

The way the activity is to be absorbed in costing determine its classification