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Alexander Custom Furniture has five indirect-cost pools (purchasing, material handling, machine maintenance, product inspection and packaging)
Alexander Custom Furniture has five indirect-cost pools (purchasing, material handling, machine maintenance, product inspection and packaging). The company is in the process of bidding on two jobs:
1) Job 0802: an order of 15 intricate personalised furniture.
2) Job 2408: an order of 6 standard personalised furniture.
The controller wants you to compare overhead allocated under the simple job-costing system and newly designed activity-based job-costing system. Total budgeted costs in each indirect-cost pool and the budgeted quantity of activity driver are as follows:
Budgeted Overhead
Activity Driver
Budgeted Quantity of Activity Driver
Purchasing
$70,000
Purchase orders processed
4,000
Material handling
$87,500
Material moves
10,000
Machine maintenance
$237,300
Machine-hours
21,000
Product inspection
$18,900
Inspections
3,780
Packaging
$39,900
Units produced
7,980
$453,600
Information related to Job 0802 and Job 2408 follows. Job 0802 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved and inspected relative to Job 2408.
Job 0802
Job 2408
Number of purchase orders
25
8
Number of material moves
10
4
Machine-hours
40
60
Number of inspections
9
3
Units produced
15
6
REQUIRED:
A) Determine the overhead rate and the total amount of overhead costs allocated to Job 0802 under a simple costing system, where overhead is allocated based on machine-hours. (4 marks)
B) Determine the overhead rate and the total amount of overhead costs allocated to Job 2408 under an activity-based costing system using the appropriate activity drivers. (11 marks)
Expert Solution
| (1) Overhead is allocated based on machine-hours. | ||||
| Pre-determined Overhead Rate = Total overhead /Machine hours | ||||
| $453,600/21,000 | ||||
| =$21.6 per machine hour | ||||
| now we will allocate it | ||||
| Job 215 | Job 325 | |||
| Machine hours | 40 | 60 | ||
| Total overhead allocated | 864 | 1296 | ||
| =40*$21.60 | = 60*$21.60 | |||
| 2) Activity base costing | ||||
| Budgeted Overhead | Activity Driver | Budgeted Quantity of Activity Driver | Budgeted Overhead /Budgeted Quantity | |
| Purchasing | $70,000 | Purchase orders processed | 4,000 | $17.50 |
| Material handling | 87,500 | Material moves | 10,000 | $8.75 |
| Machine maintenance | 237,300 | Machine-hours | 21,000 | $11.30 |
| Product inspection | 18,900 | Inspections | 3,780 | $5.00 |
| Packaging | 39,900 | Units produced | 7,980 | $5.00 |
| $453,600 |
| Budgeted Overhead /Budgeted Quantity | Job 0802 | Job 2408 | ||
| Purchasing | $17.50 | Purchase orders processed | $437.50 | $140.00 |
| Material handling | $8.75 | Material moves | $87.50 | $35.00 |
| Machine maintenance | $11.30 | Machine-hours | $452.00 | $678.00 |
| Product inspection | $5.00 | Inspections | $45.00 | $15.00 |
| Packaging | $5.00 | Units produced | $75.00 | $30.00 |
| Total | $1,097.00 | $898.00 |
| Budgeted Overhead /Budgeted Quantity | Job 0802 | Job 2408 | ||
| Purchasing | $17.50 | Purchase orders processed | =$17.50*25 | =$17.50*8 |
| Material handling | $8.75 | Material moves | =$8.75*10 | =$8.75*4 |
| Machine maintenance | $11.30 | Machine-hours | =$11.30*40 | =$11.30*60 |
| Product inspection | $5.00 | Inspections | =$5*9 | =$5*3 |
| Packaging | $5.00 | Units produced | =$5*15 | =$5*6 |
| Total | $1,097.00 | $898.00 |
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