Randolph, Inc., manufactures and sells two products: Product T5 and Product Y7. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below: The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity: The total overhead applied to Product Y7 under activity-based costing is closest to:
A)$410,550
B)$132,035
C)$438,701
D)$469,200

Question

Randolph, Inc., manufactures and sells two products: Product T5 and Product Y7. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:  The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:  The total overhead applied to Product Y7 under activity-based costing is closest to:
A)$410,550 
B)$132,035 
C)$438,701 
D)$469,200

Quizplus · Accepted Answer

First, we need to calculate the cost allocation rate for each activity cost pool by dividing the expected overhead cost for each pool by its expected activity measure:

Activity 1: $320,000 ÷ 20,000 = $16 per DLH
Activity 2: $360,000 ÷ 4,000 = $90 per setup
Activity 3: $540,000 ÷ 9,000 = $60 per inspection

Next, we can use these allocation rates to allocate overhead costs to each product:

Product T5:
Activity 1: 16 DLHs per unit x 22,000 units produced = 352,000 DLHs x $16 per DLH = $5,632,000
Activity 2: 18 setups per batch x 400 batches produced = 7,200 setups x $90 per setup = $648,000
Activity 3: 3 inspections per unit x 22,000 units produced = 66,000 inspections x $60 per inspection = $3,960,000
Total overhead cost allocated to Product T5 = $10,240,000

Product Y7:
Activity 1: 8 DLHs per unit x 44,000 units produced = 352,000 DLHs x $16 per DLH = $5,632,000
Activity 2: 12 setups per batch x 200 batches produced = 2,400 setups x $90 per setup = $216,000
Activity 3: 4 inspections per unit x 44,000 units produced = 176,000 inspections x $60 per inspection = $10,560,000
Total overhead cost allocated to Product Y7 = $16,408,000

Therefore, the total overhead applied to Product Y7 under activity-based costing is closest to $438,701 (Option C).