10. Goodrich Tires manufactures tires for dune buggies and has two different pro
ID: 2467161 • Letter: 1
Question
10. Goodrich Tires manufactures tires for dune buggies and has two different products, nubby tires and smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and incurs $167,000 of overhead costs. The following information is available:
Activity Total Cost Cost Driver
Materials handling $60,000 Number of requisitions
Machine setups 50,000 Number of setups
Quality inspections 57,000 Number of inspections
For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The smooth tires require 600 requisitions, 300 setups, and 400 inspections.
Instructions
Determine the overhead rate for each activity.
11. Caterpiller Manufacturing has five activity cost pools and two products (a budget lawnmower and a deluxe lawnmower). Information is presented below:
Cost Drivers by Product
Activity Cost Pool Cost Driver Est. Overhead Budget Deluxe
Ordering and Receiving Orders $ 120,000 600 400
Machine Setup Setups 297,000 500 400
Machining Machine hours 1,000,000 150,000 100,000
Assembly Parts 1,400,000 1,200,000 800,000
Inspection Inspections 300,000 550 450
Instructions
Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and 200,000 units of Deluxe. Round your answer to the nearest cent.
Activity Cost Pool
Cost Driver
Est. Overhead
Cost Drivers by Product
Budget Deluxe
Overhead Rate
Ordering and Receiving
Orders
$120,000
600
400
$120/order
Machine Setup
Setups
297,000
500
400
$330/setup
Machining
Machine hours
1,000,000
150,000
100,000
$4/machine hour
Assembly
Parts
1,400,000
1,200,000
800,000
$0.70/part
Inspection
Inspections
300,000
550
450
$300/inspection
Explanation / Answer
10. Overhead rate for each activity = total cost of activity*1/number of activities involved.
The first activity is material handling. Its cost driver is number of requisitions. Requisitions for nubby tires = 400 and for smooth tires = 600. Total = 400+600 = 1,000.
Thus overhead rate for material handling will be = Total cost of material handling/total requisitions
= $60,000/1,000 = $60 per requisition.
The second activity is machine setups. Its cost driver is number of setups. Setups for nubby tires = 200 and for smooth tires = 300. Total = 200+300 = 500.
The overhead rate for machine setups will be: Total amount of machine setups/number of setups
= $50,000/500 = $100 per setup.
The last activity is quality inspection and its cost driver is number of inspections. For nubby tires, no. of inspections = 200 and for smooth tires = 400. Total = 200+400 = 600.
The overhead rate will be = total amount of inspections/number of inspections
= $57,000/600
= $95 per quality inspection.
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