Sheridan makes two products, Simple and Complex. As their names suggest, Simple

Question

Sheridan makes two products, Simple and Complex. As their names suggest, Simple is the more basic product, and Complex comes with all the bells and whistles.

The company has always allocated overhead costs to products based on machine hours. Last year, the company implemented an activity-based costing system, and managers determined the following activity pools and rates based on total overhead of $1,485,700: Rate Assembly $1.25 per direct labor hour Fabrication $9.75 per machine hour Setups $18 per batch Bonding $107,700 direct to Complex Only the Complex product requires bonding, so all the costs of bonding should be allocated to Complex. The following data relate to both products. Simple Complex Units produced 128,000 46,000 Direct labor hours 238,000 109,000 Machine hours 51,000 32,000 Batches 3,000 4,500 Using the traditional method of allocating overhead costs,

• allocate overhead cost to the products.

• show that the overhead assigned to each product sums to the total company overhead.

• determine the overhead cost per unit for each product.

(Round overhead rate and overhead per unit answers to 2 decimal places, e.g. 15.25.)

Simple Complex Total Machine hours

Overhead rate $

$

Total overhead to product $

$

$

Explanation / Answer

Simple Complex Total Traditional Costing: Units Produced 128000 46000 Allocation Basis MH Direct Labor Hour 238000 109000 347000 Total OH 1485700 Machine Hour 51000 32000 83000 Total MH 83000 Batchs 3000 4500 7500 Overhead Rate PerMH 17.90 Activity Based Costing: Cost Pool Driver Rate Base Total Driver Amt Rate Assembly 1.25 DLH 347000 433750 Fabrication 9.75 MH 83000 809250 Setups 18.00 Per Batch 7500 135000 Bonding 107700 All for Complex - 107700 1485700 Allocation OH Using Traditional Costing: Simple Complex Total Machine Hour(A) 51000 32000 83000 Overhead Rate PerMH(B) 17.90 17.90 17.90 Allocation(A*B) 912900 572800 1485700 Total Overhead to Product 912900 572800 1485700 Simple Complex Total Overhead to Product(A) 912900 572800 Number of Unit Products(B) 128000 46000 Overhead PU(A/B) 7.13 12.45

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