E17-9 Compute overhead rates and assign overhead using ABC

Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April,

50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An

analysis of estimated overhead costs reveals the following activities.

Activities

Cost Drivers

Total Cost

1. Materials handling

Number of requisitions

$40,000

2. Machine setups

Number of setups

21,500

3. Quality inspections

Number of inspections

33,000

$94,500

The cost driver volume for each product was as follows.

Cost Drivers

Instruments

Gauges

Total

Number of requisitions

400

600

1,000

Number of setups

200

300

500

Number of inspections

200

400

600

Instructions

(a) Determine the overhead rate for each activity.

(b) Assign the manufacturing overhead costs for April to the two products using activity-based costing.

and compute the overhead cost per unit.

(c) Write a memorandum to the president of Air United explaining the benefits of activity-based costing.

(a)

The overhead rates are:

Expected Use

Estimated

of Cost Driver/

=

Activity-Based

Activity Cost Pools

Overhead

Activity

OH Rates

Materials Handling

Value

Value

?

/

requisition

Machine Setups

Value

Value

?

/

setup

Quality inspections

Value

Value

?

/

inspection

(b)

The assignment of overhead costs to products is as follows:

Instruments

Gauges

Total Cost

Cost Driver

Number

Cost

Number

Cost

Assigned

Requisitions

Value

?

Value

?

?

Machine setups

Value

?

Value

?

?

Inspections

Value

?

Value

?

?

Total costs assigned

?

Expected Use of Drivers

?

?

Units produced

Value

Value

OH cost per unit

?

?