Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used

Question

Isadore’s Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data:

Required:

a. Compute the amount of overhead to be allocated to each product under activity-based costing. (Do not round intermediate calculations.)

b. Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.2 for pencils and 0.1 for pens and that 40,000 boxes of pencils and 65,000 boxes of pens were produced during the period. (Do not round intermediate calculations.)

Cost Driver Volume Activity Cost Driver Cost Pencils Pens Setting up Number of setups $ 98,000 19 30 Inspecting Number of parts 30,000 4 6 Packing and shipping Number of boxes shipped 52,500 40,000 65,000 Total overhead $ 180,500

Explanation / Answer

a. Activity-based costing:

Working:

b. Direct labor-hour based allocation

Working:

Overhead allocated Pencils 70000 Pens 110500

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