Orange,Inc.has identified the following cost drivers for its expected overhead costs for the year:
Total direct labor hours budgeted = 2,000 hours.
The following data applies to Product X,one of the products completed during the year
If the activity-based cost drivers are used to allocate overhead cost,the total overhead cost of Product X will be:
A)$1,500.
B)$1,560.
C)$2,000.
D)$2,400.
E)$2,560.

Question

Orange,Inc.has identified the following cost drivers for its expected overhead costs for the year: 
Total direct labor hours budgeted = 2,000 hours.
The following data applies to Product X,one of the products completed during the year 
If the activity-based cost drivers are used to allocate overhead cost,the total overhead cost of Product X will be:
A)$1,500. 
B)$1,560. 
C)$2,000. 
D)$2,400. 
E)$2,560.

Quizplus · Accepted Answer

First, we need to calculate the predetermined overhead rate for Orange, Inc. using the given information:

Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Cost Driver

Predetermined Overhead Rate = ($9,000 + $4,500 + $1,500) / 2,000 hours

Predetermined Overhead Rate = $15 / hour

Next, we need to use the activity-based cost drivers to allocate overhead costs to Product X:

Total Cost of Product X = Direct Materials + Direct Labor + Overhead

Direct Materials = $1,000 
Direct Labor = 200 hours * $20/hour = $4,000

Overhead = Predetermined Overhead Rate * Cost Driver for Product X

Overhead = $15/hour * 120 hours

Overhead = $1,800

Total Cost of Product X = $1,000 + $4,000 + $1,800 = $6,800

Therefore, the total overhead cost of Product X is $1,800 and the answer is B.