Question

Greenwood Company manufactures two products; 15,000 units of Product Y and 7,000 units of Product Z. 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 Y and Z:

Activity Cost Activity Measure Estimated Overhead Expected Activity
Pool Cost
Machining Machine-hours $227,700 11,000 MHs Machine setups Number of setups $153,900 270 setups Production design Number of products $91,000 2 products General factory Direct labor-hours $257,000 10,000 DLHs

Activity Measure Product Y Product Z
Machining 8,700 2,300
Number of setups 60 210
Number of products 1 1
Direct labor-hours 8,700 1,300

1. What is the company’s plantwide overhead rate? (Round your answer to 2 decimal places.)
2. Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to Product Y and Product Z? (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount.)
3. What is the activity rate for the Machining activity cost pool? (Round your answer to 2 decimal places.)

Answer 1

Answer:

1) Plant-wide overhead rate = Total estimated overhead ÷ Direct labor hours

                                           = $728,900 ÷ 10,000

                                           = $73 per DLH

2) Product Y

manufacturing overhead cost = $73 × 8,700 = $635,100

Product Z

manufacturing overhead cost = $73 × 1300 = $94,900

3) Machining ⇒ $227,000 ÷ 11,000 = $21 per MH

Explanation:

              Using ABC

Step 1: Identify cost activities and their cost drivers

- Machining ⇒ Machine hours

- Machine Setups ⇒ No. of setups

- Production design ⇒ No. of products

- General factory ⇒ Direct Labor hours

Step 2: Assign overhead costs to activities identified

- Machining ⇒ $227,000

- Machine Setups ⇒ $153,900

- Production design ⇒ $91,000

- General factory ⇒ $257,000

                      Sum = $728,900

Step 3: Calculate Total Estimated Cost Driver Activity

Machining ⇒ 11,000 MHs

- Machine Setups ⇒ 270 setups

- Production design ⇒ 2 products

- General factory ⇒ 10,000 DLHs

Step 4: Calculate overhead rates

- Machining ⇒ $227,000 ÷ 11,000 = $21 per MH

- Machine Setups ⇒ $153,900 ÷ 270 = $570 per setup

- Production design ⇒ $91,000 ÷ 2 = $45,500 per product

- General factory ⇒ $257,000 ÷ 10,000 = $26 per DLH

Step 5: Apply overheads to product

Product Y

- Machining ⇒ 8,700 × $21 per MH =$182,700

- Machine Setups ⇒ 60 × $570 per setup = $34,200

- Production design ⇒ 1 × $45,500 per product = $45,500

- General factory ⇒ 8,700 × $26 per DLH = $226,200

                                                   Sum = $488,600

Product Z

- Machining ⇒ 2,300 × $21 per MH =$48,300

- Machine Setups ⇒ 210 × $570 per setup = $119,700

- Production design ⇒ 1 × $45,500 per product = $45,500

- General factory ⇒ 1300 × $26 per DLH = $33,800

                                                  Sum = $243,700

                   Using Plant-wide overhead

Plant-wide overhead rate = Total estimated overhead ÷ Direct labor hours

                                           = $728,900 ÷ 10,000

                                           = $73 per DLH

Product Y

manufacturing overhead cost = $73 × 8,700 = $635,100

Product Z

manufacturing overhead cost = $73 × 1300 = $94,900