Erskine Company uses activity-based costing to compute product costs for externa

Question

Erskine Company uses activity-based costing to compute product costs for external reports. The company has three activity centers and applies overhead using predetermined overhead rates for each activity center. Estimated costs and activities for the current year are presented below for the three activity centers:

Estimated Overhead Cost
Batch setups $30,400 Expected Activity 1,600
Material handling 69,600 Expected Activity 2,900
General factory 21,700 Expected Activity 700

Actual costs and activities for the current year were as follows:

Actual Overhead Cost
Batch setups $29,480 Actual Activity 1,600
Material handling 69,930 Actual Activity 2,850
General factory 20,960 Actual Activity 650

a. How much total overhead was applied to products during the year? Show all mathematical calculations for credit and label everything clearly.








b. By how much was overhead overapplied or underapplied? Show all mathematical calculations for credit. Be sure to clearly label your answer as to whether the overhead was overapplied or underapplied.








c. What adjustment would be made to Cost of Goods Sold for the under(over)applied overhead? Would Cost of Goods Sold be increased or decreased by the adjustment and by how much?

Explanation / Answer

a. Rates: Batch setups: $30,400/1,600 setups = $19 per setup Material handling: $69,600/2,900 = $24 per activity General factory: $21,700/700 = $31 per activity Applied: $19 per setup*1,600 setups = $30,400 $24 per activity*2850 actual activity = $68,400 $31 per activity*650 actual activity = $20,150 total applied = $30,400 + $68,400 + $20,150 = $118,950 answer: $118,950 b. Actual = $29,480 + $69,930 + $20,960 = $120,370 $120,370 - $118,950 = $1,420 underapplied answer: $1,420 underapplied c. answer: Increased by $1,420

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