Question

Jay Krue makes two products, Simple and Complex. As their names suggest,
Simple is the more basic product, and Complex comes with all the bells and whistles. The company has always allocated overhead costs to products based on machine hours. Last year, the company implemented an activity-based costing system, and managers determined the following activity pools and rates based on total overhead of $1,599,000:
Rate
Assembly ............ $1.25 per direct labor hour
Fabrication.......... $9.75 per machine hour
Setups............ $18.00 per batch
Bonding........... $170,000 direct to Complex

Only the Complex product requires bonding, so all the costs of bonding should be allocated to Complex. The following data relate to both products.


Required
a. Using the traditional method of allocating overhead costs,
• allocate overhead cost to the products.
• show that the overhead assigned to each product sums to the total company overhead.
• determine the overhead cost per unit for each product.
b. Using the activity-based costing rates,
• allocate overhead cost to the products.
• show that the overhead assigned to each product sums to the total company overhead.
• determine the overhead cost per unit for each product.
c. Explain why overhead costs differ under the two costing methods. Refer specifically to the characteristics of the twoproducts.


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  • CreatedFebruary 21, 2014
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