Ken’s Carpets sells carpet for both residential and business use. To better estimate costs, the company recently adopted an activity-based costing system. Last year, the company incurred $300,000 in overhead costs. Based on an intense study of their company, the following activities, allocation bases, and percentages of overhead costs were determined:
The Proportion of Overhead Cost
Activity
Allocation Base
25%
Purchasing
Number of purchase orders
50%
Materials processing
Number of square feet
25%
Sales
Number of sales orders
The number of activities for residential and business is as follows:
Business
–
Residential
–
Total
Total Overhead
500
–
700
Number of purchase orders
1,200
75,000
2,000,000
–
4,000,000
Number of square feet
6,000,000
150,000
100
–
400
Number of sales orders
500
75,000
Required:
–
–
A.
Calculate the total overhead that should be allocated to each of the three activities
–
Number of Purchase
$75,000
–
Number of square feet
$150,000
–
Number of sales orders
$75,000.
B.
Calculate the overhead rates for each of the three activities.
–
Number of purchase
62. 5
–
Number of square feet
0. 025
–
Number of sales orders
150
C.
If a particular residential job requires 4 purchase orders and 1 sales order for total of 1,500 square feet of carpet, how much overhead should be allocated to the job?
–
4*62. 5 + 0. 025*1,500+1*150 = $437. 50
2. Mountaineer Tents manufactures and sells heavy and light-duty tents to various outdoor retailers. To better estimate costs, the company recently adopted an activity-based costing system.
Last year, the company incurred $900,000 in overhead costs. Based on an intense study of their company, the following activities, allocation bases, and percentages of overhead costs were determined:
Activity
Allocation Base
The Proportion of Overhead Cost
Purchasing
Number of purchase orders
55%
Inspections
Number of inspections
20%
Sales
Number of sales orders
25%
The number of activities for heavy and light duty tents is as follows:
Heavy-duty
Light-duty
Number of purchase orders
5,000
4,000
Number of inspections
3,000
1,000
Number of sales orders
800
400
Required:
–
–
A.
Calculate the total overhead that should be allocated to each of the three activities
–
Number of purchase
4,950
–
Number of inspection
800
–
Number of sales
300
B.
Calculate the overhead rates for each of the three activities.
–
Number of purchase
1. 82
–
Number of inspection
5
–
Number of sales
4
C.
If a single sales order requires 10 purchase orders and 30 inspections to fill, how much overhead should be applied to the order?
–
1*4+10*1. 82+30*5 = 191. 82
3. The following overhead cost information is available for Millennium Inc. for 2006:
Activity
Allocation Base
Overhead Cost
Purchasing
Number of purchase orders
$300,000
Machine setups
Number of setups
150,000
Quality control
Number of inspections
50,000
During the year, 4,000 purchase orders were issued; 8,000 machine setups were performed, and 2,000 inspections were conducted.
Required:
–
–
A.
Calculate the overhead rates for each of the three activities
–
Purchasing
75. 00
–
Machine Setups 800
18.75
–
Quality Control
25
B.
If a particular job requires 10 purchase orders, 6 setups, and 5 inspections to fill, how much overhead should be applied to the job?
–
10*75+6*18. 75+25*5 = 987. 5