Isadore\'s Implements, Inc., manufactures pens and mechanical pencils often used

Question

Isadore's Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data:

Cost Driver Volume

(a)

Compute the amount of overhead to be allocated to each product under activity-based costing. (Do not round your intermediate calculations. Omit the "$" sign in your response.)

Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.1 for pencils and 0.2 for pens and that 45,000 boxes of pencils and 75,000 boxes of pens were produced during the period. (Do not round the cost per hour and round your final answers to nearest dollar amount. Omit the "$" sign in your response.)

Cost Driver Volume

Activity Cost Driver Cost Pencils Pens Setting up Number of setups $ 95,400 24 29 Inspecting Number of parts 29,700 3 6 Packing and shipping Number of boxes shipped 60,000 45,000 75,000 Total overhead $ 185,100

Explanation / Answer

(a)

Setting up cost = 95400

Setting up cost for pencils = 24/(24+29)*95400 = 43,200

Setting up cost for pens = 29/(24+29)*95400 = 52,200

Inspecting cost = 29700

Inspecting cost for pencils = 3/(3+6)*29700 = 9,900

Inspecting cost for pens = 3/(3+6)*29700 = 19,800

Pack/ship cost = 60,000

Pack/ship cost for pencils = 45000/(45000+75000)*60000 = 22,500

Pack/ship cost for pens = 45000/(45000+75000)*60000 = 37,500

So total overhead cost for pencils = 43200+9900+22500 = 75,600

So total overhead cost for pens = 52200+19800+37500 = 109,500

(b)

No of labor hours for pencils = 45,000 * 0.1 = 4,500

No of labor hours for pens = 75,000 * 0.2 = 15,000

So allocation for pencils = 4500/(4500+15000) = 3/13

Allocation for pens = 15000/(4500+15000) = 10/13

Setting up cost for pencils = 3/13*95400 = 22,015

Setting up cost for pens = 10/13*95400 = 73,385

Inspecting cost for pencils = 3/13*29700 = 6,854

Inspecting cost for pens = 10/13*29700 = 22,846

Pack/ship cost for pencils = 3/13*60000 = 13,846

Pack/ship cost for pens = 10/13*60000 = 46,154

So total overhead cost for pencils = 22015+6854+13846 = 42,715

So total overhead cost for pens = 73385+22846+46154 = 142,385

Hope this helped in giving a clear understanding of the solution. Let me know in case of any queries.

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