ndirect costs are allocated to the cost of a product in a manufacturing environment, or to the cost of a project or service, based on a predetermined overhead rate.

Direct labor hours or another volume measurement are often used as a basis to allocate overhead in a traditional system. Activity-based costing systems allocate indirect costs based onactivities associated with the cost being allocated.

Refer to the illustration of Activity-Based Costing as an example to guide you in answering the questions below.

Illustration of Activity-Based Costing

Using the information and data below for Products A and B, answer the following questions: Production and Cost Information: Product A requires 6 hours of labor per unit and Product B requires 12 hours. The potential drivers for the indirect costs remain the same as shown on page 2 of the illustration of Activity-based Costing.

Total marketing costs	$	39,250
Total engineering costs	$	99,000
Total setup costs	$	67,200
Labor cost per hour	$	30

Activity	Product A	Product B	Total
TV Ads	4	1	5
Engineering Cycles	17	5	22
Batched Runs	8	4	12

Total budgeted indirect costs = $

Marketing costs are allocated based on the number of - Select your answer -TV adsdevelopment cyclesbatch runsdirect labor hoursCorrect 2 of Item 1 . Product - Select your answer -ABCorrect 3 of Item 1 requires more marketing than Product - Select your answer -ABCorrect 4 of Item 1.

Engineering costs are allocated based on the number of - Select your answer -TV adsdevelopment cyclesbatch runsdirect labor hoursCorrect 5 of Item 1. More engineering costs are allocated to Product - Select your answer -ABCorrect 6 of Item 1 than Product - Select your answer -ABCorrect 7 of Item 1.

Setup costs are allocated based on the number of - Select your answer -Tv adsdevelopment cyclesbatch runsdirect labor hoursCorrect 8 of Item 1. Product - Select your answer -ABCorrect 9 of Item 1 requires more set up costs than Product - Select your answer -ABCorrect 10 of Item 1.

Before going any further, it makes sense that if indirect costs are allocated using activity-based costing, more indirect costs are allocated to Product - Select your answer -ABCorrect 11 of Item 1 than to Product - Select your answer -ABCorrect 12 of Item 1.

Allocation of Indirect Costs:

Once overhead costs are estimated and related activities are determined, the next step is to calculate the rates to be used to allocate costs.

The formula for calculating the overhead rate is:

	- Select your answer -Estimated overhead costActual overhead costDirect labor costTotal estimated activityCorrect 1 of Item 2
Overhead rate =
	- Select your answer -Estimated overhead costActual overhead costDirect labor costTotal estimated activityCorrect 2 of Item 2

Using marketing costs as an example:

	$
The marketing cost per TV ad is =		, or $ per TV ad
	TV ads

This rate is applied to the number of activities (in this case, TV ads) associated with each product. Product A requires 4 TV ads at the planned level of production and Product B requires 1 TV ad when the planned number of units are produced.

Fill in the table showing how the indirect costs are allocated to Product A and product B at the planned level of production.

							Costs allocated to:
				#	Rate per		Product A				Product B
Indirect Costs:	Total Activity:			Activities	Activity		#	Amount			#	Amount
Marketing costs	$	39,250	TV ads		$		4	$	31,400		1	$	7,850
Engineering costs		99,000	- Select your answer -TV adsDevelopment CyclesBatch RunsCorrect 8 of Item 2	22	$	4,500					5		22,500
Setup costs			Batch Runs	12	$	5,600	8		44,800
	$							$				$

Total Product Cost:

Assume the company plans to produce 500 units of Product A and 500 units of Product B. At this level of production, what are the total indirect, direct and product costs for Product A and B. Compute the cost per unit for the total product cost. Round the per unit cost to the nearest dollar.

	Product A	Product B
Total Indirect Costs	$	$
Total Labor Costs	$	$
Total Product Cost	$	$
Product Cost Per Unit	$	$