First-stage allocation, activity-based costing, manufacturing sector.Thurgood Devices uses activity-based costing to allocate overhead costs to customer orders for pricing purposes. Many customer orders are won through competitive bidding. Direct material and direct manufacturing labor costs are traced directly to each order. Thurgoods direct manufacturing labor rate is $20 per hour. The company reports the following yearly overhead costs:

Wages and salaries	$480,000
Depreciation	60,000
Rent	120,000
Other overhead	240,000
Total overhead costs	$900,000

Thurgood has established four activity cost pools:

Activity Cost Pool

Activity Measure

Total Activity for the Year

Direct manufacturing labor support

Number of direct manufacturing labor-hours

30,000 direct manufacturing labor-hours

Order processing

Number of customer orders

500 orders

Design support

Number of custom designs

100 custom designs

Other

Facility-sustaining costs allocated to orders based on direct manufacturing labor-hours

30,000 direct manufacturing labor-hours

Only about 20% of Thurgoods yearly orders require custom designs.

Paul Moeller, Thurgoods controller, has prepared the following estimates for distribution of the overhead costs across the four activity cost pools:

Direct Manufacturing Labor Support

Order Processing

Design Support

Other

Total

Wages and salaries

40%

25%

30%

5%

100%

Depreciation

25%

10%

15%

50%

100%

Rent

30%

25%

10%

35%

100%

Other overhead

20%

30%

35%

15%

100%

Order 448200 required $4,550 of direct materials, 80 direct manufacturing labor-hours, and one custom design.

Required

• 1.Allocate the overhead costs to each activity cost pool. Calculate the activity rate for each pool.
• 2.Determine the cost of Order 448200.
• 3.How does activity-based costing enhance Thurgoods ability to price its orders? Suppose Thurgood used a traditional costing system to allocate all overhead costs to orders on the basis of direct manufacturing labor-hours. How might this have affected Thurgoods pricing decisions?