7-7 Calculating traditional and ABC overhead rates (LO 2) Eric Parker has been studying his department's profitability reports for the past six months. He has just completed a managerial accounting course and is beginning to question the company's approach to allocating overhead to products based on machine hours. The current department overhead budget of $1,140,000 is based on 40,000 machine hours. In an initial analysis of overhead costs, Eric has identified the following activity cost pools. Cost Pool Expected Cost Expected Activities Product assembly $ 600,000 40,000 machine hours Machine setup and calibration 320,000 2,000 setups Product inspection 90,000 1,500 batches Raw materials storage 130,000 500,000 pounds $1,140,000 Required a.Calculate the company's overhead rate based on machine hours. b.Calculate the company's overhead rates using the proposed 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.
7-7 Calculating traditional and ABC
| Cost Pool |
Expected Cost
|
Expected Activities
|
| Product assembly |
$ 600,000
|
40,000 machine hours |
| Machine setup and calibration |
320,000
|
2,000 setups |
| Product inspection |
90,000
|
1,500 batches |
| Raw materials storage |
130,000
|
500,000 pounds |
|
$1,140,000
|
Required
a.Calculate the company's overhead rate based on machine hours.
b.Calculate the company's overhead rates using the proposed activity-based costing pools.
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