7-7

Calculating traditional and ABC overhead rates

(LO 2) Eric Parker has been studying his department's profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company's approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,140,000 is based on 40,000 machine hours. In an initial analysis of overhead costs, Eric has identified the following activity cost pools.

Cost Pool	Expected Cost	Expected Activities
Product assembly	$ 600,000	40,000 machine hours
Machine setup and calibration	320,000	2,000 setups
Product inspection	90,000	1,500 batches
Raw materials storage	130,000	500,000 pounds
	$1,140,000

Required

a.

Calculate the company's overhead rate based on machine hours.

b.

Calculate the company's overhead rates using the proposed activity-based costing pools.

7-9

Allocating overhead to products using activity-based costing

(LO 2) Refer to the data in exercise 7-7. Eric Parker is taking the next step in his exploration of activity-based costing and wants to examine the overhead costs that would be allocated to two of the department's four products. He has gathered the following budget information about each product.?

Driver Usage	Component 3F5	Component T76
Machine hours	1,000	10,000
Setups	40	20
Batches	20	10
Pounds of raw materials	10,000	10,000

Required

a.

Calculate the total overhead allocated to each component under the traditional method using machine hours as the overhead application base.

b.

Calculate the total overhead allocated to each component under activity-based costing.

7-10

Calculating product costs using traditional and activity-based costing

(LO 2) Refer to the data in Exercises 7-7 and 7-9. Eric Parker found that the budget included production of 500 units of Component 3F5 and 5,000 units of Component T76.

Required

a.

Calculate the overhead cost per unit of Component 3F5 and Component T76 under traditional costing using machine hours as the overhead application base.

b.

Calculate the overhead cost per unit of Component 3F5 and Component T76 under activity-based costing.