Adria Company recently implemented an activity-based costing system. At the begi
ID: 341635 • Letter: A
Question
Adria Company recently implemented an activity-based costing system. At the beginning of the year, management made the following estimates of cost and activity in the company's five activity cost pools: Activity Measure Expected Overhead Cost Expected Activity Activity Cost Pool Labor-related Purchase orders Material receipts Relay assembly General factory Direct labor-hours42,500 8,500 DLHs Number of orders$5,600 2,800 orders Number of receipts10,000 1,000 receipts Number of relays Machine-hours $14,400 1800 relays $ 245,000 35,000 MHs value: 10.00 points Required: 1. Compute the activity rate for each of the activity cost pools. Activity Rate Activity Cost Pool Labor-related Purchase orders Material receipts Relay assembly General factory per DLH per order per receipt per relay per MHExplanation / Answer
Solution:
Activity Based Costing System
- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.
- This system determines all the activities related to product or production process.
- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.
- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.
- It helps to distribution of overheads on the basis of activities.
The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)
Part 1 – Activity Rate
Activity Cost Pool
Expected Overhead Costs (A)
Total Expected Activity (B)
Activity Rate (C = A/B)
Labor related
$42,500
8500
DLHs
$5.00
per DLH
Purchase Orders
$5,600
2800
orders
$2.00
per order
Material receipts
$10,000
1000
receipts
$10.00
per receipt
Relay assembly
$14,400
1800
relays
$8.00
per relay
general factory
$245,000
35000
MHs
$7.00
per MH
Part 2 --- Total amount of overhead cost assigned to each product
Product A
Product B
Product C
Product D
Activity Cost Pool
Expected Overhead Costs (A)
Total Expected Activity (B)
Activity Rate (C = A/B)
Activity Driver USAGE (H)
Overhead Assigned (C*H)
Activity Driver USAGE (E)
Overhead Assigned (C*E)
Activity Driver USAGE (X)
Overhead Assigned (C*X)
Activity Driver USAGE (Z)
Overhead Assigned (C*Z)
Labor related
$42,500
8500
DLHs
$5.00
per DLH
500
$2,500
165
$825
400
$2,000
400
$2,000
Purchase Orders
$5,600
2800
orders
$2.00
per order
30
$60
70
$140
140
$280
180
$360
Material receipts
$10,000
1000
receipts
$10.00
per receipt
240
$2,400
65
$650
0
$0
95
$950
Relay assembly
$14,400
1800
relays
$8.00
per relay
0
$0
27
$216
10
$80
3
$24
general factory
$245,000
35000
MHs
$7.00
per MH
3400
$23,800
1550
$10,850
1500
$10,500
2900
$20,300
Total Overhead Assigned (O)
$317,500
$28,760
$12,681
$12,860
$23,634
Total Overhead Cost Assigned
Product A
$28,760
Product B
$12,681
Product C
$12,860
Product D
$23,634
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Activity Cost Pool
Expected Overhead Costs (A)
Total Expected Activity (B)
Activity Rate (C = A/B)
Labor related
$42,500
8500
DLHs
$5.00
per DLH
Purchase Orders
$5,600
2800
orders
$2.00
per order
Material receipts
$10,000
1000
receipts
$10.00
per receipt
Relay assembly
$14,400
1800
relays
$8.00
per relay
general factory
$245,000
35000
MHs
$7.00
per MH
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