Sultan Company uses an activity-based costing system. At the beginning of the year, the company made the following estimates of cost and activity for its five activity cost pools:

Activity Cost Pool Activity Measure Expected Overhead Cost Expected Activity
Labor-related Direct labor-hours $ 254,800 36,400 DLHs
Purchase orders Number of orders $ 8,785 251 orders
Parts management Number of part types $ 72,680 92 part types
Board etching Number of boards $ 54,900 1,830 boards
General factory Machine-hours $ 170,000 17,000 MHs
Required:

1. Compute the activity rate for each of the activity cost pools.
2. The expected activity for the year was distributed among the company's four products as follows:

Expected Activity
Activity Cost Pool Product A Product B Product C Product D
Labor-related (DLHs) 4,000 22,200 4,900 5,300
Purchase orders (orders) 78 28 50 95
Parts management (part types) 37 12 31 12
Board etching (boards) 530 700 600 0
General factory (MHs) 3,200 6,000 2,100 5,700
Using the ABC data, determine the total amount of overhead cost assigned to each product.

Sultan Company uses an activity-based costing system. At the beginning of the year, the company made the following estimates of cost and activity for its five activity cost pools:

Activity Cost Pool Activity Measure Expected Overhead Cost Expected Activity

Labor-related Direct labor-hours $ 254,800 36,400 DLHs

Purchase orders Number of orders $ 8,785 251 orders

Parts management Number of part types $ 72,680 92 part types

Board etching Number of boards $ 54,900 1,830 boards

General factory Machine-hours $ 170,000 17,000 MHs

Required:

1. Compute the activity rate for each of the activity cost pools.

2. The expected activity for the year was distributed among the company's four products as follows:

Expected Activity

Activity Cost Pool Product A Product B Product C Product D

Labor-related (DLHs) 4,000 22,200 4,900 5,300

Purchase orders (orders) 78 28 50 95

Parts management (part types) 37 12 31 12

Board etching (boards) 530 700 600 0

General factory (MHs) 3,200 6,000 2,100 5,700

Using the ABC data, determine the total amount of overhead cost assigned to each product.

The answer is:

Activity rates:

$7

/ DLH

$35

/order

$790

/part type

$30

/board

$10/MH

Overhead cost per product:

A: $107860

B: $246860

C: $99540

D: $106905

Explanation:

Activity based costing (ABC) is used to allocate costs at the beginning of a budget period so as to forecast resource use and mitigate inefficiencies arising from redundancies or losses made owing to over-allocation of resources. Sultan Company has a cost pool of activities which is allocated some resources based on estimated activity. Using the overhead costs allocated to each activity, the activity rate is calculated by: dividing the allocated overhead by the activity driver (drives overhead cost consumption). These calculations are done in the first table (see attachment). The overhead cost assigned to each product is determined by multiplying the activity rate by the level of activity required by each product. These calculations are done in the second table (see attachment)