Chapter 26, Problem 26.16EX

Single plantwide rate and activity-based costing

Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators:

Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $200 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate information is assumed to be as follows:

	Machining Activity	Setup Activity	Sales order Processing Activity
Activity rate	$160	$240	$55

A. Complete the following table, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C). (Round per-unit overhead to two decimal places and percents to one decimal place.)

Product Volume Class	Column A Single Rate Overhead Allocation per Unit	Column B ABC Overhead Allocation per Unit	Column C Percent Change in Allocation (Col. B - Col. A)/Col. A
Low
Medium
High

B. Why is the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method?

C. Interpret Column C in your table from part (A).