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HITEC Manufacturers: Overhead Rate for Each Cost Driver

49. The HITEC Company manufactures multimedia equipment designed to be sold to universities. The company's southeastern plant has undergone production changes that have resulted in decreased usage of direct labor and increased usage of automated processes. As a result, management no longer believes that its overhead allocation method is accurate and is considering changing from a traditional overhead allocation to an activity-based method. The controller has chosen the following activity centers and costs drivers for overhead:

Overhead Cost Information
Purchase orders $200,000
Setup Costs 300,000
Testing costs 420,000
Machine maintenance 800,000

Cost Driver Driver Activity
Number of orders 25,000
Number of setups 15,000
Number of tests 16,000
Machine hours 50,000


A. Calculate the overhead rate each cost driver
B. An order for 1,000 video projectors had the following requirement

Number of purchase orders 3
Number of setups 5
Number of product tests 20
Machine hours 1,500

How much total overhead should be assigned to this order?

What could management do to reduce the overhead costs assigned to these video projectors? What would be the impact on the net income of reducing overhead assigned to the video projectors?


Solution Summary

This solution determines the overhead rate for each cost driver for HITEC Manufacturers.