Brisky Corporation uses activity-based costing to compute product margins. In th

Question

Brisky Corporation uses activity-based costing to compute product margins. In the first stage, the activity-based costing system allocates two overhead accounts-equipment depreciation and supervisory expense-to three activity cost pools-Machining, Order Filling, and Other-based on resource consumption. Data to perform these allocations appear below: In the second stage, Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Finally, sales and direct cost data are combined with Machining and Order Filling costs to determine product margins. What is the product margin for Product I3 under activity-based costing? A) -$6,400 B) $3,040 C) $7,600 D) $3,820

Explanation / Answer

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A Corporation uses activity-based costing to compute product margins. In the first stage, the activity-based costing system allocates two overhead accounts-equipment depreciation and supervisory expense-to three activity cost pools-Machining, Order Filling, and Other-based on resource consumption. Data to perform these allocations appear below:

Overhead costs:
Equipment depreciation $91,000
Supervisory expense $12,300

Distribution of Resource Consumption Across Activity Cost Pools:
Activity Cost Pools
                                               Machining Order Filling Other
Equipment depreciation             0.60         0.30            0.10
Supervisory expense                  0.60         0.20            0.20

In the second stage, Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products.

Activity:
                                     MHs (Machining) Orders (Order Filling)
Product I3                      6,050                  198
Product U8                   21,800                  999
Total                           27,850                1,197

Finally, sales and direct cost data are combined with Machining and Order Filling costs to determine product margins.

Sales and Direct Cost Data:
                                           Product I3 Product U8
Sales (total)                         $73,000    $69,800
Direct materials (total)         $30,800    $18,500
Direct labor (total)               $16,600     $30,600

What is the overhead cost assigned to Product I3 under activity-based costing?
Answer choices: $13,492 or $4922 or $18414 or $61980

answer

Total Eq Dep OH = 0.6*Eqpt Dep+0.6*Sup Exp = 0.6*(91000+12300) = 61980
Total Sup Exp OH = 0.3*Eqpt Dep+0.2*Sup Exp = 0.3*91000+0.2*12300=29760

Product I3:
Eqpt Dep OH = (MHs for Prod I3/Total MHs)*Eqpt Dep OH
ie Eqp Dep OH = (6050/27850)*61980 = $13,478

Sup exp OH = (Order for Prod I3/Total Orders)*Sup Exp OH
ie Sup Exp OH = (198/1197)*29760 = $4,936

So Total OH cost assigned = $13,478 + $4,936 = $18414.................Ans   

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