Overhead Rates $($LO $9-3,5,6)$

Warren Furniture produces three models of desk chairs: Basic, Ergo, and Exec. The cost system at the Warren production facility

allocates overhead cost on the basis of direct labor hours. The company is considering updating its cost system to an activity$-$based

costing system and is interested in understanding the effects. A study team composed of the production facility's finance and

operations groups has identified three overhead cost pools along with appropriate cost drivers for each pool.

The plans for production for the next year and the budgeted direct costs and activity by product line are as follows:

Required:

a$.$ The current cost accounting system charges overhead to products based on machine$-$hours. What unit product costs will be

reported for the three products if the current cost system continues to be used?

b$.$ What are the cost driver rates for the three cost pools identified by the study team?

d$.$ What unit product costs will be reported for the three products if the ABC system proposed by the study team is adopted?

e$.$ How would the activities identified by the study team be classified in terms of the levels of the cost hierarchy?

Assembly

Setup

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