Adams Company has two products: A andB. The annual production and sales of Product A is 500 units and of Product B is 900 units. The company has traditionally used direct labor-hours (DLHs) as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.5 direct labor-hours per unit. The total estimated overhead for next period is $67,522. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows:
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.)
The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:
A)$23.05
B)$13.83
C)$135.04

Question

Adams Company has two products: A andB. The annual production and sales of Product A is 500 units and of Product B is 900 units. The company has traditionally used direct labor-hours (DLHs) as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.5 direct labor-hours per unit. The total estimated overhead for next period is $67,522. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows:
 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.)
The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:
A)$23.05 
B)$13.83 
C)$135.04

Quizplus · Accepted Answer

The predetermined overhead rate for Activity 1 under the activity-based costing system is $13.83. This is calculated by dividing the estimated overhead cost of Activity 1 ($6,915) by the expected activity level (500 units for Product A). Therefore, the best choice is B. Activity rate = Estimated overhead cost ÷ Expected activity = $6,915 ÷ 500 = $13.83

Adams Company Has Two Products: a AndB