Question

Wellington Chocolate Company uses activity-based costing (ABC). The controller identified two activities and their budgeted costs:

Setting up equipment $1,064,000
Other overheard $4,256,000

Setting up equipment is based on setup hours, and other overhead is based on oven hours. Wellington produces two products, Fudge and Cookies.
Information on each product is as follows:

Fudge Cookies
Units produced 8,000 445,000
Setup hours 15,200 3,800
Oven hours 3,800 26,600

Required:
Round your answers to the nearest whole dollar, unless otherwise directed.
1. Calculate the activity rate for (a) setting up equipment and (b) other overhead.
2. How much total overhead is assigned to Fudge using ABC?
3. What is the unit overhead assigned to Fudge using ABC? Round to the nearest cent.
4. Now, ignoring the ABC results, calculate the plantwide overhead rate, based on oven hours.

Answer 1

1. a. $56 per set up hour

1. b. $140

2. $904,400

3. $113.05

4. $175

Step-by-step explanation:

1. Activity rate Setting up equipment = Setting up equipment ÷ Fudge setup hours + Cookies setup hours

= $1,064,000 ÷ (15,200 + 3,800)

= $1,064,000 ÷ 19,000

= $56 per set up hour

Activity rate Other overhead = Other overhead ÷ (Fudge oven hours + Cookies oven hours)

= $4,256,000 ÷ (3,800 + 26,600)

= $4,256,000 ÷ 30,400

= $140

2. a. Total overhead assigned to Fudge = Activity rate Setting up equipment × Fudge cookies set up hours

= $56 × 15,200

= 851,200

b. Other overhead = Activity rate Other overhead × Fudge oven hours

= $140 × 3,800

= $532,000

Total overhead assigned to Fudge = Setting up Equipment + Other overhead

= 851,200 + 532,000

= $904,400

3. Unit overhead assigned to Fudge = Total overhead assigned to Fudge ÷ Fudge Units Produced

= 904,400 ÷ 8,000

= $113.05

4. Plant wide overhead rate = (Setting up equipment + Other overhead) ÷ (Fudge oven hours + Cookies over hours)

= ($1,064,000 + $4,256,000) ÷ (3,800 + 26,600)

= $5,320,000 ÷ 30,400

= $175