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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
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 Parker 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 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 (a) Calculate the total overhead allocated to each component under the traditional method using machine hours as the overhead application base. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to O decimal places, e.g. 5,275.) Total Overhead allocated Component 3F5 Component T76 (b) Calculate the total overhead allocated to each component under activity-based costing. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 0 decimal places, e.g. 5,275.) Total Overhead allocated Component 3F5 Component T76
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