Question

Rusties Company recently implemented an activity-based costing system. At the beginning of the year, management made the following estimates of cost and activity in the company’s five activity cost pools:

Activity Cost Pool Activity Measure Expected Overhead Cost Expected Activity
Labor-related Direct labor-hours $16,380 1,260 DLHs
Purchase orders Number of orders $1,920 640 orders
Product testing Number of tests $4,275 285 tests
Template etching Number of templates $805 35 templates
General factory Machine-hours $42,600 7,100 MHs

Required:
Compute the activity rate for each of the activity cost pools.

Answer 1

a. Labor Cost Rate= 13 $ per DLH

b. Purchase orders Rate= $ 3 per order

c. Product testing Rate = $ 15 per test

d. Template etching Rate = $ 23 per template

e. General factory Rate= $ 6 per MHs

Step-by-step explanation:

Data

Activity Activity Expected Overhead Expected

Cost Pool Measure Cost Activity

Labor-related Direct labor-hours $16,380 1,260 DLHs

Purchase orders Number of orders $1,920 640 orders

Product testing Number of tests $4,275 285 tests

Template etching Number of templates $805 35 templates

General factory Machine-hours $42,600 7,100 MHs

The activity rate can be obtained by dividing the total cost of each activity with the total cost of the driver allocated to it.

Calculations

Activity Rate = Expected Overhead Cost/ Expected Activity

a. Labor Cost Rate= $16,380 / 1,260 DLHs= 13 $ per DLH

b. Purchase orders Rate= $1,920/ 640 orders= $ 3 per order

c. Product testing Rate = $4,275 /285 tests= $ 15 per test

d. Template etching Rate = $805 /35 templates= $ 23 per template

e. General factory Rate= $42,600/ 7,100 MHs= $ 6 per MHs