Vex Corporation manufactures a variety of products. In the past, Vex had been us
ID: 2414965 • Letter: V
Question
Vex Corporation manufactures a variety of products. In the past, Vex had been using a traditional overhead allocationsystem based on macjine hours. For the current year, Vex decided to swithch to activity-based costing using machine hours and the number of inspections as measures of activity. Information on these measures of activity are related overhead rates for the current year are as follows; ESTIMATED ACTIVITY PREDETERMINED OVERHEAD RATE.
Machine Hours 50,000 $8 Per Machine Hour
Number of inspections 3,000 $40 per inspection
Job no. 812 for the current year required 15 machine hours and 2 inspections. Would this job have been overcosted or undercosted under the traditional sytem.
SHOW SOLUTION STEP BY STEP.
Explanation / Answer
Cost of Job under activity based costing = (15 machine hours x Predetermined overhead rate) + (2 inspections x Predetermined overhead rate)
= (15 x 8) + (2 x 40)
= $200
Total Overheads = (50000 x 8) + (3000 x 40) = $520000
Total machine hours = 50000
Predetermined overhead rate under traditional costing = 520000 / 50000
= $10.40 per machine hour
Cost of Job under traditional costing = (10.40 x 15)
= $156
Therefore the Job would have been undercosted by 200 - 156 = $44 under the traditional system.
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