Younger, Inc. manufactures recliners for the hotel industry. It has two products
ID: 2476660 • Letter: Y
Question
Younger, Inc. manufactures recliners for the hotel industry. It has two products, the Heater and the Massager, and total overhead is $3,160,000. The company plans to manufacture 400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company must perform 600 material moves for the Heater and 400 for the Massager; it processes 900 purchase orders for the Heater and 700 for the Massager; and the company's employees work 1,400 direct labor hours on the Heater product and 3,400 on the Massager. Younger's total material handling costs are $2,000,000 and its total processing costs are $1,160,000. Using ABC, how much overhead would be assigned to the Heater product?
Explanation / Answer
Calculation of Activity Rates:
Cost Pool
Total Overhead
Activity
Total Activity
Activity Rate
A
B
A/B
Material handling costs
$ 2,000,000
Material Moves
1000
$ 2,000
Per Material Move
(600+400)
Processing Costs
$ 1,160,000
Purchase Orders
1600
$ 725
Per Purchase Order
(900+700)
Calculation of overhead assigned to the Heater product:
Cost Pool
Total Activity
Activity Rate
Overhead cost
A
B
A*B
Material handling costs
600
$ 2,000
$ 1,200,000
Processing Costs
900
$ 725
$ 652,500
Overhead assigned to the Heater product:
$ 1,852,500
Calculation of Activity Rates:
Cost Pool
Total Overhead
Activity
Total Activity
Activity Rate
A
B
A/B
Material handling costs
$ 2,000,000
Material Moves
1000
$ 2,000
Per Material Move
(600+400)
Processing Costs
$ 1,160,000
Purchase Orders
1600
$ 725
Per Purchase Order
(900+700)
Calculation of overhead assigned to the Heater product:
Cost Pool
Total Activity
Activity Rate
Overhead cost
A
B
A*B
Material handling costs
600
$ 2,000
$ 1,200,000
Processing Costs
900
$ 725
$ 652,500
Overhead assigned to the Heater product:
$ 1,852,500
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