Q2TI - Horngren'S Financial And Managerial Accounting

Question

Question: Newton Company has analyzed its production process and identified two primary activities. These activities, their allocation bases, and their estimated costs are listed below.

Activity	Allocation Base	Estimated Activity	Estimated Costs
Purchasing	Number of purchase orders	200 purchase orders	\( 10,000
Materials Handling	Number of parts	15,000 parts	\) 7,500

The company manufactures two products: Regular and Super. The products use the following resources in March:

Regular Super

Number of purchase orders 5 purchase orders 7 purchase orders

Number of parts 600 parts 750 parts

 

5. Compute the predetermined overhead allocation rates using activity-based costing.

6. Determine the amount of overhead allocated to Regular products in March.

7. Determine the amount of overhead allocated to Super products in March.

Step-by-Step Solution

Answer

Predetermined overhead allocation rate 

For Purchasing cost:$50

For Material handling cost:$0.5

 

Overhead cost for Regular Product:$550

Overhead cost for Super Product:$725

Step-by-Step-Solution Step1: Computation of predetermined overhead allocation rate

$$\begin{gathered} Purchaingcostrate=\frac{EstimatedCost}{No.ofpurchaseorders} \\ =\frac{\$10,000}{200} \\ =\$50 \\ Machinehandlingrate=\frac{{\displaystyle EstimatedCost}}{{\displaystyle No.ofparts}} \\ =\frac{{\displaystyle \$7,500}}{{\displaystyle 15,000}} \\ =\$0.5 \end{gathered}$$

Step 2: Overhead cost for regular product

$$\begin{gathered} Purchasingcost=Predeterminedoverheadallocationrate\times No.ofpurchaseorders \\ =\$50\times 5 \\ =\$250 \\ Materialhandlingcost=Predeterminedoverheadallocationrate\times No.ofparts \\ =\$0.5\times 600 \\ =\$300 \\ TotalOverheadcost=Purchasingcost+Materialhandlingcost \\ =\$250+300 \\ =\$550 \end{gathered}$$

Step 3: Overhead cost for super product

$$\begin{gathered} Purchasingcost=Predeterminedoverheadallocationrate\times No.ofpurchaseorders \\ =\$50\times 7 \\ =\$350 \\ Materialhandlingcost=Predeterminedoverheadallocationrate\times No.ofparts \\ =\$0.5\times 750 \\ =\$375 \\ TotalOverheadcost=Purchasingcost+Materialhandlingcost \\ =\$350+375 \\ =\$725 \end{gathered}$$