Q25E - Horngren'S Financial And Managerial Accounting

Question

Question: Refer to Exercise E19-24. The president of Western suspects that her allocation of indirect costs could be giving misleading results, so she decides to develop an ABCsystem. She identifies three activities: documentation preparation, information technologysupport, and training. She figures that documentation costs are driven by thenumber of pages, information technology support costs are driven by the number ofsoftware applications used, and training costs are driven by the number of direct laborhours worked. Estimates of the costs and quantities of the allocation bases follow:

Activity	Estimated Cost	Allocation Base	Estimated quantity of allocation base
Documentation Preparation	\( 85,850	Pages	1,317 Pages
Information technology support	150,150	Applications used	715 applications
Training	424,000	Direct labor hours	4,000 hours
Total Indirect costs	\) 640,000

 

Compute the predetermined overhead allocation rate for each activity. Round to thenearest dollar.

 

Step-by-Step Solution

Answer

Predetermined Overhead Allocation Rate

Documentation Preparation:$50

Information Technology Support:$210

Training:$106

Step-by-Step-Solution Step1: Documentation Preparation

$$\begin{gathered} Predeterminedoverheadrate=\frac{EstimatedCost}{Quantityofallocationbase} \\ =\frac{\$65,850}{1,317} \\ =\$50 \end{gathered}$$

Step 2: Information Technology Support

$$\begin{gathered} Predeterminedoverheadrate=\frac{EstimatedCost}{Quantityofallocationbase} \\ =\frac{\$150,150}{715} \\ =\$210 \end{gathered}$$

Step 3: Training

$$\begin{gathered} Predeterminedoverheadrate=\frac{EstimatedCost}{Quantityofallocationbase} \\ =\frac{\$424,000}{4,000} \\ =\$106 \end{gathered}$$