Kramer corporation is a diversified manufacturer of consumer goods. The company

Question

Kramer corporation is a diversified manufacturer of consumer goods. The company activity based costing system has the following seven activity cost pools :

Activity Cost Pool :         Estimated overhead cost:             Expected Activity :

Labor related                    48000                                    20000 direct labor hours
Machine related                67500                                    45000 Machine hours
Machine setups                 84000                                    600 setup
Production orders             112000                                   400 orders
Product testing                 58500                                     900 tests
Packaging 0                     90000                                      6000 packages
General factory                672000                                    20000 direct labor hours

Require:
1) Compute the activity rate for each activity cost pool

2) Compute the company's predetermined overhead rate, assuming that the company uses a single plant wide determined overhead rate based on direct labor hours

Explanation / Answer

Computations of activity-based overhead rates: Activity Cost Pool Estimated Overhead/ Expected use of Activity-Based Cost drivers = Overhead Rates Labor related 48,000 20,000 $2.40 per direct labor hour Machine related 67,500 45,000 $1.50 per machine hour Machine setups 84,000 600 $140 per set up Production orders 112,000 400 $280 per order Product testing 58,500 900 $65 per test Packaging 90,000 6,000 $15 per package General factory 672,000 20,000 $33.6 direct labor hour 2. Pre-determined overhead rate = Estimated total manufacturing overhead cost/Estimated total amount of the allocation base                                                   = $1,132,000/20,000 direct labor hours                                                    = $56.6 Computations of activity-based overhead rates: Activity Cost Pool Estimated Overhead/ Expected use of Activity-Based Cost drivers = Overhead Rates Labor related 48,000 20,000 $2.40 per direct labor hour Machine related 67,500 45,000 $1.50 per machine hour Machine setups 84,000 600 $140 per set up Production orders 112,000 400 $280 per order Product testing 58,500 900 $65 per test Packaging 90,000 6,000 $15 per package General factory 672,000 20,000 $33.6 direct labor hour

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