Sanborn Industries has the following overhead costs and cost drivers. Direct lab
ID: 2388399 • Letter: S
Question
Sanborn Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year.Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity
Ordering and Receiving Orders $120,000 500 orders
Machine Setup Setups 297,000 450 setups
Machining Machine hours 1,500,000 125,000 MH
Assembly Parts 1,200,000 1,000,000 parts
Inspection Inspections 300,000 500 inspections
If overhead is applied using activity-based costing, the overhead application rate for ordering and receiving is
(A) $1.20 per direct labor hour.
(b) $6,834 per order.
(c) $240 per order.
(d) $0.12 per part.
Explanation / Answer
Activity-Based Overhead Rate = [Estimated Overhead per Activity / Expected Use of Cost drivers per activity]
Activity Cost Pool
Estimated Cost Driver
Overhead Cost Driver Activity
Ordering and Receiving Orders
500 orders
$120,000
Machine Setup Setups
450 setups
$297,000
Machining Machine hours
125,000 Machine hours
$1,500,000
Assembly
1,000,000 parts
$1,200,000
Inspections
500 inspections
$300,000
If Overhead is applied using activity-based costing, the overhead application rate for ordering and receiving is:
Activity-Based Overhead Rate = [$120,000 / 500]
Activity-Based Overhead Rate = $240
Hence, the correct option is (c) $240 per order.
Activity Cost Pool
Estimated Cost Driver
Overhead Cost Driver Activity
Ordering and Receiving Orders
500 orders
$120,000
Machine Setup Setups
450 setups
$297,000
Machining Machine hours
125,000 Machine hours
$1,500,000
Assembly
1,000,000 parts
$1,200,000
Inspections
500 inspections
$300,000
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