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    HITEC Manufacturers: Overhead Rate for Each Cost Driver

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    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?

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    Solution Summary

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