Hagar Co. computed an overhead rate for machining costs ($1,500,000) of $15 per

Question

Hagar Co. computed an overhead rate for machining costs ($1,500,000) of $15 per machine hour. Machining costs are driven by machine hours. If computed based on direct labor hours, the overhead rate for machining costs would be $30 per direct labor hour. The company produces two products, Cape and Chap. Cape requires 60,000 machine hours and 20,000 direct labor hours, while Chap requires 40,000 machine hours and 30,000 direct labor hours. Using activity-based costing, machining costs assigned to each product is

Explanation / Answer

Since the company is following Activity based costing the overhead allocation shall be as per Machine Hours.

Thus Overhead Allocation as per Activity Based Costing is as under

Cape : 60,000 Machine Hours * $ 15 per Machine Hour = $ 900,000

Chap : 40,000 Machine Hours * $ 15 per Machine Hour = $ 600,000

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