Orear Corporation manufactures two products: Product Z34D and Product J25M. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Z34D and J25M. Using the plantwide overhead rate, the percentage of the total overhead cost that is allocated to Product J25M is closest to:
A) 50.00%
B) 30.00%
C) 15.15%
D) 19.87%

Question

Orear Corporation manufactures two products: Product Z34D and Product J25M. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products Z34D and J25M.  Using the plantwide overhead rate, the percentage of the total overhead cost that is allocated to Product J25M is closest to:
A) 50.00% 
B) 30.00% 
C) 15.15% 
D) 19.87%

Quizplus · Accepted Answer

Using the plantwide overhead rate, total overhead cost = $630,000
Direct labor-hours for Product Z34D = 4,000
Direct labor-hours for Product J25M = 6,000

Plantwide overhead rate = $630,000 / (4,000 + 6,000) = $63 per direct labor-hour

Overhead cost allocated to Product J25M = 6,000 x $63 = $378,000

To use ABC, we need to allocate the overhead to four cost pools - setup, machining, assembly, and inspection - based on the activities that drive the overhead costs.

The table below shows the overhead cost and activity information for each cost pool:

Cost Pool	Overhead Cost	Setup Hours	Machining Hours	Assembly Hours	Inspection Hours
Setup	$120,000	200	-	-	-
Machining	$300,000	-	20,000	-	-
Assembly	$150,000	-	-	10,000	-
Inspection	$60,000	-	-	-	2,000
Total	$630,000	200	20,000	10,000	2,000

To allocate the overhead cost to each product, we need to determine how much of each activity is required to produce one unit of each product. The table below shows the activity requirements for each product:

Product	Setup Hours	Machining Hours	Assembly Hours	Inspection Hours
Z34D	1	5	2	0.5
J25M	2	1	1	1.5

Using these activity requirements and the cost pool information, we can calculate the overhead cost for each product as follows:

Product Z34D:
Setup cost = 1 x $120,000 / 200 = $600
Machining cost = 5 x $300,000 / 20,000 = $7,500
Assembly cost = 2 x $150,000 / 10,000 = $3,000
Inspection cost = 0.5 x $60,000 / 2,000 = $1,500

Total overhead cost for Z34D = $12,600

Product J25M:
Setup cost = 2 x $120,000 / 200 = $1,200
Machining cost = 1 x $300,000 / 20,000 = $15
Assembly cost = 1 x $150,000 / 10,000 = $15
Inspection cost = 1.5 x $60,000 / 2,000 = $45

Total overhead cost for J25M = $1,275

Therefore, the percentage of the total overhead cost that is allocated to Product J25M using ABC is:

Total overhead cost for J25M / Total overhead cost = $1,275 / $630,000 = 0.2024 or 20.24%

The percentage is closest to choice B (30.00%).

Orear Corporation Manufactures Two Products: Product Z34D and Product J25M