Orange, Inc. has identified the following cost drivers for its expected overhead

Question

Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year: Total direct labor hours budgeted = 2,400 hours. The following data applies to one of the products-completed during the year:

Total direct labor hours budgeted = 2,400 hours. The following data applies to one of the products-completed during the year:

If direct labor hours are used on a traditional costing system to assign overhead, the total overhead cost for Product X will be ________?

If the activity-based cost drivers are used to allocate overhead cost, the total overhead cost of Product X will be ________?

Setrp Ordring Mainnnre Power 40,000 Number ofsetups 20000 Namber ofonrs 50000 Marhinehours 10,00 Kilowatt hours 200 1,00I 5,000 10 000

Explanation / Answer

1) Total overhead = (40000+20000+50000+10000) = 120000

Overhead cost per hour = 120000/2400 = 50 per labour hour

Total overhead cost of product X = 40*50 = 2000

2) Calculate total overhead cost under activity based costing :

If the activity-based cost drivers are used to allocate overhead cost, the total overhead cost of Product X will be 1560.

Cost Activity rate Overhead allocation Setup 40000/200 200 per setup 200*4 = 800 Ordering 20000/1000 20 per orders 8*20 = 160 Maintenance 50000/5000 10 per machine hour 50*10 = 500 Power 10000/10000 1 per kilowatt hours 100*1 = 100 Total overhead cost 1560

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