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