Question

Morgana Company identifies three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $205,900, $265,100, and $78,400, respectively. The cost driver for each activity and the estimated annual usage are number of setups 2,900, machine hours 24,100, and number of inspections 1,600. Compute the overhead rate for each activity.

Answer 1

Overhead cost per set-up =$71

Overhead cost per machine hour =$11

Overhead cost per inspection=$49

Step-by-step explanation:

Activity-based costing is a form of absorption costing where overheads are charged to product using cost drivers. Under this method, overheads are first analyzed and categorized by the activities responsible for them and then charged to product based on the amount of benefits enjoyed using cost drivers.

Activity rate is calculated as:

Activity cost for the period / Total cost drivers for the period

So, we can apply this formula as follows:

Overhead cost per set-up = $205,900/2,900 set-ups=$71

Overhead cost per machine hour = $265,100/24,100 hours=$11

Overhead cost per inspection = $78,400/1,600 inspection=$49