Adams Company has two products: A and B. The annual production and sales of Prod

Question

Adams Company has two products: A and B. The annual production and sales of Product A is 2,400 units and of Product Bis 1,800 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.5 direct labor-hours per unit and Product B requires 0.8 direct labor-hours per unit. The total estimated overhead for next period is $106,575. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows: Expected Activity Estimated Overhead Costs Activities Cost Pools Product A Product B Total 3,000 Activity 1 $32,932 1,700 1,300 Activity 2 18,757 2,400 900 3,300 1,280 1,500 2,780 General Factory Total 54,886 $106,575 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.) The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to: O $5.68 O $39.48 O $32.30 O $7.82

Explanation / Answer

Predetermined Overhead rate = Activity Cost /Total Activity

= $ 18,757/ 3,300

= $ 5.68

Hence the correct answer is $ 5.68

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