Computing Product Costs Using 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:

  1. Using the estimates for the year, compute the predetermined overhead rate for each activity (this is step 4 of the activity-based costing process).
  2. 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

Last Updated on September 17, 2018