Spin Cycle Company uses three activity pools to apply overhead to its products.

Question

Spin Cycle Company uses three activity pools to apply overhead to its products. Each activity has a cost driver used to allocate the overhead costs to the product. The activities and related overhead costs are as follows: product design $48,400; machining $315,700; and material handling $116,000. The cost drivers and expected use are as follows.

Activities

Cost Drivers

Expected Use of Cost
Drivers per Activity

(a) Compute the predetermined overhead rate for each activity. (Round overhead rate per machine hours to 2 decimal places, e.g. $2.25 and all other answers to 0 decimal places, e.g. $1,225.)

Overhead Rate

(b) Classify each of these activities as unit-level, batch-level, product-level, or facility-level.

Activities

Level

Activities

Cost Drivers

Expected Use of Cost
Drivers per Activity

Product design Number of product changes 15 Machining Machine hours 157,000 Material handling Number of setups 110

Explanation / Answer

(a) Predetermined Overhead rate for each activity is as follow:

Product design=48400/15
=3226 no of product changes

Machining = 315700/157000
=2.01 mahine hours

Material Handling =116000/110
   =1054 no of setups

(b)Product design is a Product level activity because it relates to a specif product irrespective how many units or batches are produced.

Machining is a unit level activity because these activities are performed each time a unit of a product is produced and varies according to the units produced

Material Handling is a batch level activity because these varies according to the no of units in the batch and setup is cost driver of batch level activity.

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