Question

Garden Zurich Corp. manufactures garden fountains. It currently has two product lines, the basic and the luxury. Garden Zurich has a total of $171,500 in overhead. Direct costs are $200 for the basic and $300 for the luxury. The basic is sold for $500 and the luxury for $750. The company has identified the following information about its overhead activity cost pools and the two product lines. They currently produce 800 basic and 500 luxury:
Activity Cost Pools Cost Driver Cost Assigned to Pool Quantity/Amount Consumed by Basic Quantity/Amount Consumed by Luxury
Materials handling Number of moves $14,000 20 moves 50 moves
Quality control Number of inspections $37,500 250 inspections 125 inspections
Machine maintenance Number of machine hours $120,000 5,000 machine hours 5,000 machine hours

Required:
a. Suppose Hazelnut used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line. (Do not round intermediate calculations.)
b. Calculate the activity rates for each cost pool in Hazelnut

Answer 1

Answer:

Garden Zurich Corp.

a. Traditional costing system with machine hours as the cost driver:

Overhead rate = $171,500/10,000 = $17.15

Overhead assigned to each product line:

Basic = $85,750 ($17.15 * 5,000)

Luxury = $85,750 ($17.15 * 5,000)

b. Activity rates for each cost pool:

Materials handling = $200 ($14,000/70)

Quality control = $100 ($37,500/375)

Machine maintenance = $120 ($120,000/1,000)

Explanation:

a) Data and Calculations:

Total overhead = $171,500

                             Basic    Luxury

Direct costs         $200      $300

Selling price          500         750

Contribution       $300      $450

Production units   800        500

Activity Cost           Cost Driver  Cost Assigned to Pool  Quantity/Amount  

Pools                                                                              Basic        Luxury

Materials handling Number of moves         $14,000      20           50 moves

Quality control       Number of inspections $37,500   250          125 inspec.

Machine                 Number of machine

maintenance            hours                         $120,000  5,000    5,000 m.hour

Total overhead costs                                  $171,500