Adams Corporation makes two products: Product A and Product B. Annual production

Question

Adams Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product and 900 units of Product B. The company has traditionally used direct labor-hours for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.5 direct labor-hours per unit. The total estimated overhead for next period is $67,522. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory - with estimated overhead costs and expected activity as follows: (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.) The predetermined overhead rate under the traditional costing system is closest to which value? $8.91 $13.83 $103.88 $54.86

Explanation / Answer

The predetermined overhead rate under the traditional costing system is closest to : option C : $103.88

Calculation: Product A = total direct hours = 0.4 * 500 = 200

Product B = total direct hours = 0.5 * 900 = 450

Total direct hours worked = 650 hours

Total overhead = $67522

So, The predetermined overhead rate under the traditional costing system = $67522 / 650 = $103.88 per hour

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