Question

Greenwood company manufactures two products–14,000 units of product Y and 6,000 units of product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for products Y and Z:

Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity
Machining Machine-hours 209,000 10,000 MHS
Machine Setups Number of setups 171,100 290 setups
Production Design Number of products 93,000 2 products
General Factory Direct labor-hours 259,000 10,000 DLHS

Activity Measure Product Y Product Z
Machining 8,900 1,100
Number of Setups 50 240
Number of Products 1 1
Direct Labor-hours 8,900 1,100

Required: Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to product Y and product Z?

Answer 1

Using the plantwide overhead rate of $73.21 per direct labor-hour, the manufacturing overhead cost allocated to product Y is $651,569 and to product Z is $80,531.

Step-by-step explanation:

To determine how much manufacturing overhead cost is allocated to product Y and product Z using a plantwide overhead rate based on direct labor-hours, we add up the total estimated overhead costs and divide by the total direct labor-hours to find the overhead rate per direct labor-hour. Then, multiply the overhead rate by the direct labor-hours for each product.

The total overhead costs are $209,000 for Machining + $171,100 for Machine Setups + $93,000 for Production Design + $259,000 for General Factory, which equals $732,100. The total direct labor-hours (DLHS) are 10,000. Therefore, the overhead rate is $732,100 / 10,000 DLHS = $73.21 per direct labor-hour.

Now, to allocate the costs:

• Product Y uses 8,900 direct labor-hours, so its overhead cost is 8,900 DLHS * $73.21/DLHS = $651,569.
• Product Z uses 1,100 direct labor-hours, so its overhead cost is 1,100 DLHS * $73.21/DLHS = $80,531.