Question: Marshall Precision Devices uses activity based costing to allocate overhead

Marshall Precision Devices uses activity- based costing to allocate overhead to customer orders for pricing purposes. Many customer orders are won through competitive bidding. Direct material and direct manufacturing labor costs are traced directly to each order. Marshall’s direct manufacturing labor rate is $ 18 per hour. The company reports the following yearly overhead costs:
Wages and salaries ......... $ 400,000
Depreciation ............ 50,000
Rent .............. 100,000
Other overhead .......... 200,000
Total overhead costs ........ $ 750,000

Marshall has established four activity cost pools:

Only about 20% of Marshall’s yearly orders require custom designs.
Jen Chandler, Marshall’s controller, has prepared the following estimates regarding distribution of the overhead costs across the four activity cost pools:

Order 448200 required $ 10,550 of direct materials, 120 direct manufacturing labor- hours, and one custom design.

1. Allocate the overhead costs to each activity cost pool. Calculate the activity rate for each pool.
2. Determine the cost of Order 448200.
3. How does activity- based costing enhance Marshall’s ability to price its orders? If Marshall used a traditional costing system allocating all overhead to orders on the basis of direct manufacturing labor- hours, how might this have impacted Marshall’sprofitability?

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  • CreatedJanuary 15, 2015
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