A Company has used a two-stage cost allocation system for many years. In the first stage, plant overhead costs are allocated to two production departments, P1 and P2 based on machine hours. In the second stage, the company uses direct labor hours to assign overhead costs from the production departments to individual products A and B.
Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual machine hours in P1 and P2 are 12,000 and 28,000 hours, respectively.
After attending a seminar to learn the potential benefits of adopting an activity-based costing system (ABC), Ted Norris, the president of the Company, is considering implementing an ABC system. Upon his request, the controller at the Company has compiled the following information for analysis:
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Please see the attached file.
Budgeted Factory Overhead Cost $300,000.00
Machine Hours P1 12,000
Machine Hours P2 28,000
Cost Pool Factory Overhead Cost Activity Cost Driver Expected Activity Level Cost Per Hour
M/c Set Up $100,000 Set Up Hours 1,000 $100.00
Inspection $50,000 Inspection Hours 2,500 $20.00
Power $50,000 KW hours 25,000 $2.00
Supervision $100,000 Direct Labor Hours 10,000 $10.00
Total Overhead Cost $300,000
Units produced and sold 5,000 ...
This solution helps with a problem involving unit cost for products.