During the year, 100,000 parts were handled (75,000 for firm mattresses and 25,0

Question

During the year, 100,000 parts were handled (75,000 for firm mattresses and 25,000 for extra-firm mattresses), 20,000 firmness tests were conducted (12,500 for firm and 7,500 for extra-firm), and 10,000 customer calls were answered (7,500 for firm and 2,500 for extra-firm).

Required:

A.  On the basis of an activity-based approach, determine the total amount of overhead that should be assigned to firm and extra-firm mattresses.

B.  If a firm mattress requires five parts, two tests, and one customer call, then what amount of overhead should be assigned to that mattress?
$

Total Overhead Firm mattresses $ Extra-Firm mattresses $ The Bouncy Baby Crib Mattress Company sells firm and extra-firm mattresses. The company's president, Anna Greer, has become interested in the possibility of improving company performance by more closely monitoring overhead costs. She has decided to adopt an activity-based costing system for the current year. Last year, the company incurred $2,000,000 in overhead costs related to the following activities: During the year, 100,000 parts were handled (75,000 for firm mattresses and 25,000 for extra-firm mattresses), 20,000 firmness tests were conducted (12,500 for firm and 7,500 for extra-firm), and 10,000 customer calls were answered (7,500 for firm and 2,500 for extra-firm). On the basis of an activity-based approach, determine the total amount of overhead that should be assigned to firm and extra-firm mattresses. If a firm mattress requires five parts, two tests, and one customer call, then what amount of overhead should be assigned to that mattress?

Explanation / Answer

A. Total Overhead for Firm mattresses = Material processing cost + firmness testing cost + customer call cost

=75,000/100000*1400000 + 12,500/20000*400000 + 7500/10000*200000 = $1,450,000

Total Overhead for Extra Firm mattresses =$2,000,000-$1,450,000 =$550,000

B. Material processing cost for 75,000 parts = 75,000/100000*1400000

Material processing cost for 5 parts = 5/100000*1400000 = $70

firmness testing cost for 12,500 tests= 12,500/20000*400000

firmness testing cost for 2 tests = 2/20000*400000 =$40

customer call cost for (7,500 calls = 7500/10000*200000

customer call cost for 1 call = 1/10000*200000 =$20

amount of overhead should be assigned to that mattress = 70+40+20 = $130

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