Overhead Cost Pools Amount $ 69,000 82,800 219,000 100,000 108,000 142,800 360,0
ID: 2466706 • Letter: O
Question
Overhead Cost Pools
Amount
$ 69,000
82,800
219,000
100,000
108,000
142,800
360,000
$1,081,600
Activity Cost Pools
Cost Drivers
Expected Use of
Cost Drivers
(a)
Thakin Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2014 are as follows.Overhead Cost Pools
Amount
Purchasing$ 69,000
Handling materials82,800
Production (cutting, milling, finishing)219,000
Setting up machines100,000
Inspecting108,000
Inventory control (raw materials and finished goods)142,800
Utilities360,000
Total budget overhead costs$1,081,600
For the last 4 years, Thakin Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2014, 100,000 machine hours are budgeted.
Jeremy Nolan, owner-manager of Thakin Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolan’s request, Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
Activity Cost Pools
Cost Drivers
Expected Use of
Cost Drivers
Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steve’s request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways.
Direct materials $104,300 Direct labor $113,100 Machine hours 15,300 Direct labor hours 5,600 Number of purchase orders 60 Number of material moves 800 Number of machine setups 100 Number of inspections 450 Number of components 16,000 Number of square feet occupied 8,000
Explanation / Answer
Formula for Predetermined overhead rate under traditional costing is,
Predetermined overhead rate = Estimated Manufacturing overhead cost / estimated number of units in the allocation base.
To compute above formul;a, we need Estimated Manufacturing overhead cost and estimated number of units in the allocation base:
Estimated Manufacturing overhead cost = $1,081,600 (given directly) and
estimated number of units in the allocation base, here we need to take total machine hours as the basis, that means Total estimated machine hours = 100,000 machine hours are budgeted (already given)
Therefore,
Predetermined overhead rate = Estimated Manufacturing overhead cost / estimated number of units in the allocation base.
= $1,081,600 / 100,000 machine hours
= 10.816 = $10.82per machine hour (rounded off).
Therefore, Predetermined overhead rate = $10.82per machine hour
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