Question

Hilton Company manufactures two products: Product A100 and Product X500. The company currently uses a plantwide overhead rate based on direct labor-hours. The Hilton Company is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for Hilton Company as a whole and for Products A100 and X500.

Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity
Machining Machine-hours $231,000    11,000 MHs
Machine setups Number of setups $180,000    300 setups
Production design Number of products $94,000    2 products
General factory Direct labor-hours $260,000    13,200 DLHs

Activity Measure Product Y Product Z
Machine-hours 8,000 3,000
Number of setups 60 240
Number of products 1 1
Direct labor-hours 7,000 6,200

Required:
a. What is the company’s plantwide overhead rate?
b. Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to Product Y and Product Z?
c. What is the activity rate for the Machining activity cost pool?
d. What is the activity rate for the Machine Setups activity cost pool?
e. What is the activity rate for the Product Design activity cost pool?

Answer 1

Results are below.

Step-by-step explanation:

First, we need to calculate the predetermined overhead rate:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 765,000 / (7,000 + 6,200)

Predetermined manufacturing overhead rate= $57.95 per direct labor hour

Now, we can allocate overhead to each product:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Product Y:

Allocated MOH= 57.95*7,000= $405,650

Product Z:

Allocated MOH= 57.95*6,200= $359,390

Finally, the allocation rates based on ABC:

Machining= 231,000 /11,000= $21 per machine hour

Machine setups= 180,000/300= $600 per setup

Production design= 94,000 / 2= $47,000 per product