activity-based costing

Computing Product Costs Using Activity-Based Costing: Petrov Company identified the following activities, estimated costs for each activity, and identified cost drivers for each activity for this coming year. (These are the first three steps of the activity-based costing model).

Activity

Cost Driver

Estimated Annual Overhead Costs

Estimated Annual Cost Driver Activity

Production setup

Number of production runs

$ 60,000

100 production runs

Materials handling

Yards of material purchased

140,000

10,000 yards purchased

Quality control

Number of inspections

80,000

800 inspections

Total

$280,000

The company produces two products, MX1 and MX2. Information about these products of the month of March follows:

MX1

MX2

Direct materials cost per unit

$20

$30

Direct labor costs per unit

$15

$45

Overhead cost per unit

?

?

Product cost per unit

?

?

Units produced

1,000 units

700 units

Actual cost driver activity levels for the month of March are as follows:

MX1

MX2

Number of production runs

3

6

Yards of materials purchased

550

230

Number of inspections

40

10

Required:

a. Using the estimates for the year, compute the predetermined overhead rate for each activity (this is step 4 of the activity-based costing process).

b. Using the activity rates calculated in requirement a and the actual cost driver activity levels shown for March, allocate overhead to the three products for the month of March (this is step 5 of the activity-based costing process).

Template for part (a)

Activity

Cost Driver

Estimated Overhead Costs

Estimated Cost Driver Activity

Pre-determined Overhead Rate

Production setups

Number of production units

$ [__________]

[____] runs

$[____] per production run

Materials handling

Yards of materials purchased

$ [__________]

[____] yards

$[____] per yard purchased

Quality control

Number of inspections

$ [__________]

[____] inspections

$[____] per inspection

Total

$ [__________]

Template for part (b)

MX1

MX2

Pre-determined

Overhead Rate

Cost Driver Activity

Overhead Allocated

Cost Driver Activity

Overhead Allocated

$[____] per production run

[___]

$ [__________]

[___]

$ [__________]

$[____] per yard purchased

[___]

$ [__________]

[___]

$ [__________]

$[____] per inspection

[___]

$ [__________]

[___]

$ [__________]

Total allocated

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