Q17E_1 - Horngren'S Financial And Managerial Accounting

Question

Koehler (see Exercise E19-15 and Exercise E19-16) makes handheld calculators in two models—basic and professional—and wants to further refine its costing system by allocating overhead using activity-based costing. The estimated \(721,000 of manufacturing overhead has been divided into three primary activities: Materials Handling, Machine Setup, and Insertion of Parts. The following data have been compiled:

 

	Material Handling	Machine Setup	Insertion of Parts	Total
Overhead costs	\) 45,000	\( 136,000	\) 540,000	$ 721,000
Allocation base	Number of parts	Number of setups	Number of parts
Expected usage:
Basic Model	32 parts per calculator	24 setups per year	32 parts per calculator
Professional                 Model	58 parts per calculator	44 setups per year	58 parts per calculator

                               

Requirement 1

Koehler expects to produce 200,000 basic models and 200,000 professional models. Compute the predetermined overhead allocation rates using activity-based costing. How much overhead is allocated to the basic model? To the professional model?

Step-by-Step Solution

Answer

Predetermined overhead allocation rate

For material handling: $500 per part

For machine setup: $2,000 per setup

For inspection of parts: $6,000 per part

 

Overhead cost allocation 

Basic Model: $256,000

Professional Model: $465,000

Step-by-Step-Solution Step 1: Computation of predetermined overhead allocation rate

$\begin{array}{c}\mathbf{For}\mathbf{ }\mathbf{Material}\mathbf{ }\mathbf{handling}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{cost}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{material}\mathbf{ }\mathbf{handling}}{\mathbf{Total}\mathbf{ }\mathbf{number}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{parts}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{45}\mathbf{,}\mathbf{000}}{\mathbf{32}\mathbf{+}\mathbf{58}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{45}\mathbf{,}\mathbf{000}}{\mathbf{90}}\\ \mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{500}\mathbf{perpart}\end{array}$

$\begin{array}{c}\mathbf{For}\mathbf{ }\mathbf{Machine}\mathbf{ }\mathbf{setup}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{cost}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{machine}\mathbf{ }\mathbf{setup}}{\mathbf{Total}\mathbf{ }\mathbf{number}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{setups}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{136}\mathbf{,}\mathbf{000}}{\mathbf{24}\mathbf{+}\mathbf{44}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{136}\mathbf{,}\mathbf{000}}{\mathbf{68}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{persetup}\end{array}$

$\begin{array}{c}\mathbf{For}\mathbf{ }\mathbf{Insertion}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{parts}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{cost}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{insertion}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{parts}}{\mathbf{Total}\mathbf{ }\mathbf{number}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{parts}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{540}\mathbf{,}\mathbf{000}}{\mathbf{32}\mathbf{+}\mathbf{58}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{540}\mathbf{,}\mathbf{000}}{\mathbf{90}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{000}\mathbf{ }\mathbf{perpart}\end{array}$

Step 2: Computation of overhead allocation to Basic Model

Activity costs	Predetermined overhead allocation rate	X	Actual quantity of allocation base	=	Allocated overhead cost
Material handling	$500 per part	X	32 parts	=	$16,000
Machine setup	$2,000 per setup	X	24 setups	=	$48,000
Inspection of parts	$6,000 per part		32 parts	=	$192,000
Total					$256,000

Step 3: Computation of overhead allocation to Professional Model

Activity costs	Predetermined overhead allocation rate	X	Actual quantity of allocation base	=	Allocated overhead cost
Material handling	$500 per part	X	58 parts	=	$29,000
Machine setup	$2,000 per setup	X	44 setups	=	$88,000
Inspection of parts	$6,000 per part		58 parts	=	$348,000
Total					$465,000