7-6 Calculating traditional and ABC overhead rates (LO 2) Smith Machining makes three products. The company's annual budget includes $1,000,000 of overhead. In the past, the company allocated overhead based on expected capacity of 40,000 direct labor hours. The company recently implemented an activity-based costing system and has determined that overhead costs can be broken into four overhead pools: order processing, setups, milling, and shipping. The following is a summary of company information: Expected Cost Expected Activities Order processing $ 175,000 10,000 orders Setups 160,000 4,000 setups Milling 410,000 20,500 machine hours Shipping 255,000 25,000 shipments $1,000,000 Required a.Calculate the company's overhead rate based on direct labor hours. b.Calculate the company's overhead rates using the activity-based costing pools.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
7-6 Calculating traditional and ABC
|
Expected Cost
|
Expected Activities
|
|
| Order processing |
$ 175,000
|
10,000 orders |
| Setups |
160,000
|
4,000 setups |
| Milling |
410,000
|
20,500 machine hours |
| Shipping |
255,000
|
25,000 shipments |
|
$1,000,000
|
Required
a.Calculate the company's overhead rate based on direct labor hours.
b.Calculate the company's overhead rates using the activity-based costing pools.
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