Question

Flynn Industries has three activity cost pools and two products. It estimates production 2,000 units of Product BC113 and 1,000 of Product AD908. Having identified its activity cost pools and the cost drivers for each pool, Flynn accumulated the following data relative to those activity cost pools and cost drivers.
Estimated Use of
Annual Overhead Data Cost Drivers per Product
Estimated
Activity Cost Cost Estimated Estimated Use of Product Product
Pools Drivers Overhead Cost Drivers BC13 AD908
Per Activity
Machine setup Setups $21,500 43 22 21
Machining Machine hours 101,430 4,830 1,190 3,640
Packing Orders 34,020 540 110 430
Using the above data, do the following:
A) Prepare a schedule showing the computations of the activity-based overhead rates per cost driver.
B) Prepare a schedule assigning each activity's overhead cost to the two products.
C) Compute the overhead cost per unit for each product.
D) Comment on the comparative overhead cost per product.

Answer 1

Answer:

Flynn Industries

A) A) Schedule of Overhead cost rates per cost driver:

Setup                 $21,500            43 = $500 ($21,500/43) per setup

Machine hours   101,430       4,830  =   $21 ($101,430/4,830) per m.hour

Orders                34,020          540  =   $63 ($34,020/540) per order

B) Schedule assigning overhead costs to the two products:

                          Rates   Product BC113                Product AD908

Setup                 $500     $11,000 ($500 * 22)     $10,500 ($500 * 21)

Machine hours     $21     24,990 ($21 * 1,190)       76,440 ($21 * 3,640)

Orders                 $63        6,930 ($63 * 110)         27,090 ($63 * 430)

Total overheads                $42,920                         $114,030

Estimated production           2,000                               1,000

C) Overhead cost per unit $21.46 ($42,920/2,000) $114.03 ($114,030/1,000)

D) With activity-based costing, despite the fact that Product BC113 has 2,000 units, it has the least total overhead costs assigned to it, while AD908 with 1,000 units was allocated more overhead costs.  This situation is caused by the different usage or consumption of activities by the two products.

Explanation:

a) Data and Calculations:

Product lines                        Product BC113     Product AD908

Estimated production (units)     2,000                   1,000

Activity Pools   Cost drivers      Overhead     Usage       BC13       AD908  

Machine setup  Setups               $21,500            43          22           21

Machining         Machine hours   101,430       4,830      1,190     3,640

Packing             Orders                34,020          540         110         430