9) Fletes Corporation manufactures two products: Product 095C and Product M31N.

Question

9) Fletes Corporation manufactures two products: Product 095C and Product M31N. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products 095C and M31N Activity Cost Pool Machining Machine setups Product design Order size Activity Measure Machine-hours Number of setups Number of products Direct labor-hours Total Cost Total Activity S 207,000 9,000 MHs S 140,000 350 setups S 98,000 2 products S 340,000 10,000 DLH s Activity Measure Product 095C Product M31N 6,000 190 3,000 160 Machine-hours Number of setups Number of products Direct labor-hours 4,000 6,000 A) $392,500 B) $ 1 36.000 C) $399,000 D) $263,000

Explanation / Answer

Step 1: Calculation of the Cost Driver Rate Cost Driver Rate = Activity Cost / Cost Driver Activity Cost / Cost Driver = Activity Cost Driver   Activity Cost   "/"   Cost Driver " = " To Cost Driver Rate Machiening   Machiene Hours                         2,07,000 "/"                            9,000 " = " To                        23.00 Machiene SetUps Number of Set-ups                         1,40,000 "/"                               350 " = " To                      400.00 Product Design Number of Products                             98,000 "/"                                    2 " = " To                49,000.00 Order Size Direct Labour Hours                         3,40,000 "/"                         10,000 " = " To                        34.00 Step 2: Calculation of the Cost Driver Rate Per Unit Per Product Activity Product O95C Cost Driver Used "X " By Cost Driver Rate   " = " To Activity Cost Machiening   Machiene Hours                               6,000 "X " By $                     23.00 " = " To $              1,38,000 Machiene SetUps Product O95C Number of Set-ups                                   190 "X " By $                   400.00 " = " To $                 76,000 Product Design Product O95C Number of Products                                        1 "X " By $             49,000.00 " = " To $                 49,000 Direct Labour Hours Order Size Product O95C                               4,000 "X " By $                     34.00 " = " To $              1,36,000 Total $              3,99,000 Answer = Option C = $                                   3,99,000

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