Problem 2:

1. ABC Industries uses activity-based costing to assist management in setting prices for the companys three major product lines. The following information is available:

Expected Use of

Activity Cost Pool Estimated Overhead Cost Driver per Activity

Cutting $2,000,000 25,000 labor hours

Stitching 4,000,000 300,000 machine hours

Inspections 2,000,000 150,000 labor hours

Packing 860,000 60,000 finished goods units

Instructions

Compute the activity-based overhead rates.

2. Ahmed Industries manufactures dining chairs and tables. The following information is available:

Dining Chairs Tables Total Cost

Machine setups 400 1,200 $96,000

Inspections 500 900 $140,000

Labor hours 5,000 4,000 10,000 hours

Ahmed Industries is considering switching from one overhead rate based on labor hours to activity-based costing.

Instructions

Perform the following analyses for these two components of overhead:

a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate.

b. Compute total machine setups and inspection costs assigned to each product, using activity-based costing.

c. Comment on your findings.