Question

Davis-Bell Corporation has an activity-based costing system with three activity cost pools - Machining, Setting Up, and Other. The company's overhead costs have already been allocated to the cost pools and total $5,800 for the Machining cost pool, $4,700 for the Setting Up cost pool, and $7,500 for the Other cost pool. Costs in the machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products are below: MHs Batches Product Z7 3,800 700 Product K9 6,200 300 Total 10,000 1,000 Calculate activity rates for each activity cost pool using activity-based costing. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

Answer 1

Activity rates for the Machining cost pool and Setting Up cost pool are $0.58 per MH and $4.70 per batch, respectively. The overhead assigned to Product Z7 would be $2,204 for Machining and $3,290 for Setting Up, while Product K9 would have $3,596 for Machining and $1,410 for Setting Up.

Step-by-step explanation:

To calculate the activity rates for each activity cost pool using activity-based costing (ABC), we need to divide the total cost for each pool by the total activity units for that pool. For the Machining pool, this means dividing the total pool cost of $5,800 by the total machine hours (MHs) of 10,000, giving us a rate of $0.58 per MH. For the Setting Up pool, we divide the total pool cost of $4,700 by the total number of batches, 1,000, resulting in a rate of $4.70 per batch. The Other cost pool costs are not assigned to products.

Next, to determine the amount of overhead cost assigned to each product, we multiply the activity rates by the activity units consumed by each product. For Product Z7, this means $0.58 per MH × 3,800 MHs for machining, plus $4.70 per batch × 700 batches for setting up. For Product K9, we calculate $0.58 per MH × 6,200 MHs for machining, plus $4.70 per batch × 300 batches for setting up.

By using activity-based costing, the firm can more accurately allocate overhead costs to products based on their actual consumption of activities, leading to better cost control and pricing strategies.

Answer 2

Answer and Explanation:

The computation is given below:

Calculation of Activity Rates

Cost Pool Cost Driver Cost Activity Rate

Machining Machine Hours $5800 $0.58 (5800 ÷ 10000)

Setting Up Batches $4700 $4.70 (4700 ÷ 1000)

Calculation of Overhead Cost to each Product:

Particulars Product Z7 Product K9 Total

Machining $2204 ($0.58 × 3800) $3596 ($0.58 × 6200) $5800

Setting Up $3290 ($4.7 × 700) $1410 ($4.7 × 300) $4700

$5494 $5006 $10500