Hickory Company manufactures two products—13,000 units of Product Y and 5,000 un

Question

Hickory Company manufactures two products—13,000 units of Product Y and 5,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:

  

Activity Cost Pool

Activity Measure

Estimated Overhead Cost

Expected Activity

  Machining

Machine-hours

$

238,800   

12,000

MHs

  Machine setups

Number of setups

$

93,100   

190

setups

  Production design

Number of products

$

83,000   

2

products

  General factory

Direct labor-hours

$

373,500   

14,400

DLHs

  

Activity Measure

Product Y

Product Z

  Machine-hours

6,900

5,100

  Number of setups

40

150

  Number of products

1

1

  Direct labor-hours

7,900

6,500

Required:

What is the company’s plantwide overhead rate? (Round your answer to 2 decimal places.)

Predetermined overhead rate

per DLH

Required:

Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to Product Y and Product Z? (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount.)

Product Y

Product Z

Manufacturing overhead allocated

Required:

What is the activity rate for the Machining activity cost pool? (Round your answer to 2 decimal places.)

Activity rate

per MH

Required:

What is the activity rate for the Machine Setups activity cost pool?

Activity rate

per setup

Required:

What is the activity rate for the Product Design activity cost pool?

Activity rate

per product

Required:

What is the activity rate for the General Factory activity cost pool? (Round your answer to 2 decimal places.)

Activity rate

per DLH

Required:

Which of the four activities is a batch-level activity?

Machine setups activity

Product design activity

Machining activity

General factory activity

Which of the four activities is a product-level activity?

General factory activity

Machining activity

Machine setups activity

Product design activity

Required:

Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Y? (Do not round intermediate calculations and round your final answer to the nearest dollar amount.)

Total manufacturing overhead cost

Required:

Using the ABC system, how much total manufacturing overhead cost would be assigned to Product Z? (Do not round intermediate calculations and round your final answer to the nearest dollar amount.)

Total manufacturing overhead cost

Required:

Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to Product Y and Product Z? (Round your intermediate calculations to 2 decimal places. Round your "Percentage" answers to 2 decimal places. (i.e. 0.1234 should be entered as 12.34).)

Product Y

Product Z

Manufacturing overhead

%

%

Required:

Using the ABC system, what percentage of the Machining costs is assigned to Product Y and Product Z?(Round your intermediate calculations to 2 decimal places. Round your "Percentage" answers to 2 decimal places. (i.e. 0.1234 should be entered as 12.34).)

Product Y

Product Z

Machining cost

%

%

Required:

Using the ABC system, what percentage of Machine Setups cost is assigned to Product Y and Product Z?(Round your intermediate calculations to 2 decimal places. Round your "Percentage" answers to 2 decimal places. (i.e. 0.1234 should be entered as 12.34).)

Product Y

Product Z

Machine Setups cost

%

%

Required:

Using the ABC system, what percentage of the Product Design cost is assigned to Product Y and Product Z? (Round your answers to 2 decimal places.)

Product Y

Product Z

Product design cost

%

%

Required:

Using the ABC system, what percentage of the General Factory cost is assigned to Product Y and Product Z? (Round your intermediate calculations to 2 decimal places. Round your "Percentage" answers to 2 decimal places. (i.e. 0.1234 should be entered as 12.34).)

Product Y

Product Z

General factory cost

%

%

Hickory Company manufactures two products—13,000 units of Product Y and 5,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Y and Z:

Explanation / Answer

Solution:

Total estimated overhead cost (a)

Total expected direct labor - hours (b)

Predetermined overhead rate (a) ÷ (b)

2. The overhead cost assignments to Products Y and Z are as follows:

Total direct labor hours (a)

Plantwide overhead rate per DLH (b)

Manufacturing overhead allocated (a) × (b)

Activity Cost Pool

Estimated Overhead Cost

Machining, at $19.90 per machine-hour

General factory, at $25.94 per direct labor - hour

Total overhead cost assigned

Plantwide Approach

Manufacturing overhead

Activity - Based Costing System

Machining

General factory

The Machining allocation percentages used in the ABC system are similar to the plantwide allocation percentages because the Machining cost pool uses a unit - level activity measure (machine - hours). Since the plantwide cost pool also uses a unit - level allocation base (direct labor - hours), it is reasonable to expect these cost allocations percentages to be comparable.

Under the ABC system, 21% and 79% of the Machine Setups cost is allocated to Products Y and Z, respectively, whereas the plantwide approach allocates 55% and 45% of all overhead costs to the two products. These allocation percentages are different because Machine Setups is a batch - level cost pool. Although Product Y is the high - volume product (13,000 units) and Product Z is the low - volume product (5,000 units), Product Y only consumes 21% of the total machine setups and Product Z consumes 79% of the total machine setups. The conventional system is allocating too much of the machine setup costs to Product Y and too little of these costs to Product Z.

Under the ABC system, 50% of the Product Design cost is allocated to each product, whereas the plantwide approach allocates 55% and 45% of all overhead costs to Products Y and Z, respectively. These percentages are different because Product Design is a product - level cost pool. Although Product Y is the high volume product (13,000 units) and Product Z is the low - volume product (5,000 units), both products consume 50% of the product design resources. The conventional system is allocating too much of the product design costs to Product Y and too little of these costs to Product Z.

1. The plantwide overhead rate is computed as follows:

Total estimated overhead cost (a)

$788,400

Total expected direct labor - hours (b)

14,400 DLHs

Predetermined overhead rate (a) ÷ (b)

$54.75 per DLH

2. The overhead cost assignments to Products Y and Z are as follows:

Product Y Product Z

Total direct labor hours (a)

7,900 6,500

Plantwide overhead rate per DLH (b)

$54.75 $54.75

Manufacturing overhead allocated (a) × (b)

$432,525 $355,875 3-6. The activity rates are computed as follows: (a) (b) (a) ÷ (b)

Activity Cost Pool

Estimated Overhead Cost

Expected Activity Activity rate   Machining $238,800 12,000 MHs $19.90 per MH   Machine setups $93,100 190 setups $490.00 per setup   Production design $83,000 2 products $41,500.00 per product   General factory $373,500 14,400 DLHs $25.94 per DLH 7. Machine setups is a batch - level activity. A setup is performed to run a batch of units. The cost of the setup is determined by the resources
consumed performing the setup and it is not influenced by the number of units processed once the setup is complete. 8. The product design activity is a product - level activity. The product design cost is determined by the number of products supported and it is
not influenced by the number of batches or units processed. 9-10. Using the ABC system, the total manufacturing overhead assigned to Products Y and Z is computed as follows: Product Y Product Z Expected Activity Amount Expected Activity Amount

Machining, at $19.90 per machine-hour

6,900 $137,310 5,100 $101,490 Machine setups, at $490.00 per setup 40 $19,600 150 $73,500 Product design, at $41,500 per product 1 $41,500 1 $41,500

General factory, at $25.94 per direct labor - hour

7,900 $204,906 6,500 $168,594

Total overhead cost assigned

$403,316 $385,084 11-15. The percentages of overhead assigned using the plantwide and ABC approaches are computed as follows: Product Y Product Z Total (a) (a) ÷ (c) (b) (b) ÷ (c) (c)

Plantwide Approach

Amount % Amount % Amount

Manufacturing overhead

$432,525 54.86% $355,875 45.14% $788,400

Activity - Based Costing System

Machining

$137,310 57.50% $101,490 42.50% $238,800 Machine setups $19,600 21.05% $73,500 78.95% $93,100 Product design $41,500 50.00% $41,500 50.00% $83,000

General factory

$204,906 54.86% $168,594 45.14% $373,500 $403,316 $385,084 $788,400

The Machining allocation percentages used in the ABC system are similar to the plantwide allocation percentages because the Machining cost pool uses a unit - level activity measure (machine - hours). Since the plantwide cost pool also uses a unit - level allocation base (direct labor - hours), it is reasonable to expect these cost allocations percentages to be comparable.

Under the ABC system, 21% and 79% of the Machine Setups cost is allocated to Products Y and Z, respectively, whereas the plantwide approach allocates 55% and 45% of all overhead costs to the two products. These allocation percentages are different because Machine Setups is a batch - level cost pool. Although Product Y is the high - volume product (13,000 units) and Product Z is the low - volume product (5,000 units), Product Y only consumes 21% of the total machine setups and Product Z consumes 79% of the total machine setups. The conventional system is allocating too much of the machine setup costs to Product Y and too little of these costs to Product Z.

Under the ABC system, 50% of the Product Design cost is allocated to each product, whereas the plantwide approach allocates 55% and 45% of all overhead costs to Products Y and Z, respectively. These percentages are different because Product Design is a product - level cost pool. Although Product Y is the high volume product (13,000 units) and Product Z is the low - volume product (5,000 units), both products consume 50% of the product design resources. The conventional system is allocating too much of the product design costs to Product Y and too little of these costs to Product Z.

Under the ABC system, the General Factory allocation percentages are the same as the plantwide allocation percentages because the General Factory cost pool is allocated to products using the same unit - level activity measure (direct labor - hours) as the plantwide approach.

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