Question

Younger, Inc. manufactures recliners for the hotel industry. It has two products, the Heater and the Massager, and total overhead is $3,160,000. The company plans to manufacture 400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company must perform 600 material moves for the Heater and 400 for the Massager; it processes 900 purchase orders for the Heater and 700 for the Massager; and the company's employees work 1,400 direct labor hours on the Heater product and 3,400 on the Massager. Younger's total material handling costs are $2,000,000 and its total processing costs are $1,160,000.

Using ABC, how much overhead would be assigned to the Heater product?

Answer 1

Overhead assigned to Heater = $1,852,500.

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 per driver is calculated as:

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

Overhead cost per driver for Young Inc

Activity cost per driver

Material handling 2,000,000 /(600+400) = $2000 per move

Processing cost 1,160,000/(900+700) order= $725 per order

Overhead assigned to heather product =

(2000 × 600 ) + (725 × 900) = $1,852,500.