Chapter C, Problem 1APSA

To determine

Concept Introduction:

Manufacturing overhead allocation:

Manufacturing overhead cost is the pool of all indirect costs incurred for the production. These are the costs which are not directly traceable to the product. Manufacturing costs include indirect material indirect labor and overheads. These costs are allocated to the products using the overhead allocation rate. The formula for overhead allocation rate is as follows:

$\text{Overhead allocation rate = }\frac{\text{Estimated Manufacturing overhead Cost}}{\text{Allocation base}}$

Requirement-1:

To determine: Activity overhead rates

Answer to Problem 1APSA

Solution: Activity overhead rates are as follows:

Activity	Activity Rate
Grinding	$ 24.62	Per Machine Hour
Polishing	$ 10.38	Per Machine Hour
Product Modification	$ 40.00	Per Engineering Hour
Providing Power	$ 15.00	Per Direct Labor Hour
System Calibration	$ 1,250.00	Per Batch

Explanation of Solution

Explanation: Activity overhead rates are calculated as follows:

Activity	Overhead Cost	Allocation base		Activity Rate
	A	B		= A/B
Grinding	$ 320,000	13000	Machine Hours	$ 24.62	Per Machine Hour
Polishing	$ 135,000	13000	Machine Hours	$ 10.38	Per Machine Hour
Product Modification	$ 600,000	15000	Engineering Hours	$ 40.00	Per Engineering Hour
Providing Power	$ 255,000	17000	Direct Labor Hours	$ 15.00	Per Direct Labor Hour
System Calibration	$ 500,000	400	Batches	$ 1,250.00	Per Batch

Conclusion

Conclusion: Hence, costs are allocated to the products using the overhead allocation rate.

To determine

Requirement-2:

To determine: The overhead Costs assigned to jobs

Answer to Problem 1APSA

Solution: The overhead Costs assigned to jobs are as follows:

• Job 3175 = $74,650

• Job 4286 = $383,425

Explanation of Solution

Explanation: The overhead Costs assigned to jobs are calculated as follows:

Job 3175:
Activity	Allocation base		Activity Rate	Allocated Overhead Cost
	A		B	=A*B
Grinding	550	Machine Hours	$ 24.62	$ 13,538.46
Polishing	550	Machine Hours	$ 10.38	$ 5,711.54
Product Modification	26	Engineering Hours	$ 400.00	$ 10,400.00
Providing Power	500	Direct Labor Hours	$ 15.00	$ 7,500.00
System Calibration	30	Batches	$ 1,250.00	$ 37,500.00
Total Overhead Cost allocated to Job 3175 (C)				$ 74,650.00

Job 4286:
Activity	Allocation base		Activity Rate	Allocated Overhead Cost
	A		B	=A*B
Grinding	5500	Machine Hours	$ 24.62	$ 135,384.62
Polishing	5500	Machine Hours	$ 10.38	$ 57,115.38
Product Modification	32	Engineering Hours	$ 400.00	$ 12,800.00
Providing Power	4375	Direct Labor Hours	$ 15.00	$ 65,625.00
System Calibration	90	Batches	$ 1,250.00	$ 112,500.00
Total Overhead Cost allocated to Job 4286 =				$ 383,425.00

Conclusion

Conclusion: Hence, costs are allocated to the products using the overhead allocation rate.

To determine

Requirement-3:

To determine: The overhead Cost per unit for each job

Answer to Problem 1APSA

Solution: The overhead Cost per unit for each job is as follows:

• Job 3175 = $373.25 Per unit

• Job 4286 = $1543.27 Per unit

Explanation of Solution

Explanation: The overhead Cost per unit for each job is calculated as follows:

Job 3175:
Activity	Allocation base		Activity Rate	Allocated Overhead Cost
	A		B	=A*B
Grinding	550	Machine Hours	$ 24.62	$ 13,538.46
Polishing	550	Machine Hours	$ 10.38	$ 5,711.54
Product Modification	26	Engineering Hours	$ 400.00	$ 10,400.00
Providing Power	500	Direct Labor Hours	$ 15.00	$ 7,500.00
System Calibration	30	Batches	$ 1,250.00	$ 37,500.00
Total Overhead Cost allocated to Job 3175 (C)				$ 74,650.00
Number of Units (D)				200
Overhead Cost per unit = (C/D)				$ 373.25

Job 4286:
Activity	Allocation base		Activity Rate	Allocated Overhead Cost
	A		B	=A*B
Grinding	5500	Machine Hours	$ 24.62	$ 135,384.62
Polishing	5500	Machine Hours	$ 10.38	$ 57,115.38
Product Modification	32	Engineering Hours	$ 400.00	$ 12,800.00
Providing Power	4375	Direct Labor Hours	$ 15.00	$ 65,625.00
System Calibration	90	Batches	$ 1,250.00	$ 112,500.00
Total Overhead Cost allocated to Job 4286 =				$ 383,425.00
Number of Units (D)				2,500
Overhead Cost per unit = (C/D)				$ 153.37

Conclusion

Conclusion: Hence, costs are allocated to the products using the overhead allocation rate.

To determine

Requirement-4:

To determine: The overhead Cost allocated per unit for each job using the plant wide overhead rate

Answer to Problem 1APSA

Solution: The overhead Cost allocated per unit for each job using the plant wide overhead rate is as follows:

• Job 3175 = $382.88 Per unit

• Job 4286 = $306.31 Per unit

Explanation of Solution

Explanation: The overhead Cost allocated per unit for each job using the plant wide overhead rate is as follows:

Total Estimated Overhead Cost (A)	$ 1,810,000
Total Machine hours (B)	13,000
Overhead allocation rate (C) = A/B =	$ 139.23
For Job 3175:
Overhead allocated (D) = (550 MH *C)	$ 76,576.92
Number of Units (E)	200
Overhead Cost per unit = (D/E)	$ 382.88
For Job 4286:
Overhead allocated (D) = (5500 MH *C)	$ 765,769.23
Number of Units (E)	2500
Overhead Cost per unit = (D/E)	$ 306.31

Conclusion

Conclusion: Hence, all overhead costs are allocated using a single plant wide overhead rate.

To determine

Requirement-5:

To Compare: The overhead Cost allocated per unit under both the methods

Answer to Problem 1APSA

Solution: The overhead Cost allocated per unit under both the methods is compared as follows:

Overhead Cost per unit:	ABC Method	Plant wide Method
Job 3175	$ 373.25	$ 382.88
Job 4286	$ 153.37	$ 306.31

Explanation of Solution

Explanation: The overhead Cost allocated per unit under both the methods is compared as follows:

Overhead Cost per unit:	ABC Method	Plant wide Method
Job 3175	$ 373.25	$ 382.88
Job 4286	$ 153.37	$ 306.31

Activity bases costing method is better method to allocated the overhead costs.

Conclusion

Conclusion: Hence, it can be concluded that the Activity bases costing method is better method to allocated the overhead costs.