More ABC Practice

Cooper Kids Cars produces two lines of battery powered cars for kids: a basic Jeep model and a luxury

Corvette line. The owner, Caroline Cooper, suspects that her products are costed improperly and her

Jeep line is subsidizing her Corvette product. She wants to employ ABC to get a better handle on her

Overhead costs. She identifies the following cost pools:

Activity Center

Cost Driver

Traceable

Costs

Total Activity

Jeep Activity

Corvette

Activity

Assembly

# of parts

$500,000

20,000

8,000

12,000

Detailing

Direct-labor

hours

$300,000

4,000

1,000

3,000

General

Machine-hours

$200,000

5,000

3,500

1,500

Total Overhead Costs are budgeted at $1,000,000.

Required:

a.

Compute the predetermined overhead rate if a traditional, plant-wide rate is used. Use

machine-hours as your driver. Apply overhead to both the Jeep and Corvette product lines.

b. Compute the overhead rate for each activity center.

c.

Assume ABC is used. Compute the amount of overhead that should be applied to both the Jeep

and Corvette product lines.

d. Comment on whether you think ABC is appropriate for Cooper Kids Cars. Do you think cross-

subsidization was occurring at this company?

e. Cooper is considering taking on a one-time special order which would require 1,000 parts, 200

direct labor hours and 1,300 machine hours. Using the Activity Center OH rates you computed

in part (c), how much overhead would be applied to this special order if she accepts it.