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Q17E_1

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 1069

Short Answer

Koehler (see Exercise E19-15 and Exercise E19-16) makes handheld calculators in two models—basic and professional—and wants to further refine its costing system by allocating overhead using activity-based costing. The estimated $721,000 of manufacturing overhead has been divided into three primary activities: Materials Handling, Machine Setup, and Insertion of Parts. The following data have been compiled:

Material Handling

Machine Setup

Insertion of Parts

Total

Overhead costs

$ 45,000

$ 136,000

$ 540,000

$ 721,000

Allocation base

Number of parts

Number of setups

Number of parts

Expected usage:

Basic Model

32 parts per calculator

24 setups per year

32 parts per calculator

Professional

Model

58 parts per calculator

44 setups per year

58 parts per calculator

Requirement 1

Koehler expects to produce 200,000 basic models and 200,000 professional models. Compute the predetermined overhead allocation rates using activity-based costing. How much overhead is allocated to the basic model? To the professional model?

Predetermined overhead allocation rate

For material handling: $500 per part

For machine setup: $2,000 per setup

For inspection of parts: $6,000 per part

Overhead cost allocation

Basic Model: $256,000

Professional Model: $465,000

See the step by step solution

Step by Step Solution

Step-by-Step-SolutionStep 1: Computation of predetermined overhead allocation rate

Step 2: Computation of overhead allocation to Basic Model

Activity costs

Predetermined overhead allocation rate

X

Actual quantity of allocation base

=

Allocated overhead cost

Material handling

$500 per part

X

32 parts

=

$16,000

Machine setup

$2,000 per setup

X

24 setups

=

$48,000

Inspection of parts

$6,000 per part

32 parts

=

$192,000

Total

$256,000

Step 3: Computation of overhead allocation to Professional Model

Activity costs

Predetermined overhead allocation rate

X

Actual quantity of allocation base

=

Allocated overhead cost

Material handling

$500 per part

X

58 parts

=

$29,000

Machine setup

$2,000 per setup

X

44 setups

=

$88,000

Inspection of parts

$6,000 per part

58 parts

=

$348,000

Total

$465,000

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