ABC Corporation manufactures a variety of products. ABC has been using a traditional overhead allocation system based on machine-hours. For the current year ABC decided to switch to an activity-based costing system using machine-hours and the number of inspections of activity. Information on these measures of activity and related overhead of the current year are as follows: [table]
Indirect Cost | Estimated Activity Machine Cost | $400,000 | 50,000 Machine-hours Inspections Cost | $120,000 | 3,000 Inspections Total | $520,000 |
[/table] Job #110 for the current year required 15 machine-hours and 2 inspections. What would be the total overhead cost allocated to this job? (no comma, no $ sign)

Question

ABC Corporation manufactures a variety of products. ABC has been using a traditional overhead allocation system based on machine-hours. For the current year ABC decided to switch to an activity-based costing system using machine-hours and the number of inspections of activity. Information on these measures of activity and related overhead of the current year are as follows: [table]
Indirect Cost | Estimated Activity Machine Cost | $400,000 | 50,000 Machine-hours Inspections Cost | $120,000 | 3,000 Inspections Total | $520,000 | 
[/table] Job #110 for the current year required 15 machine-hours and 2 inspections. What would be the total overhead cost allocated to this job? (no comma, no $ sign)

BlackTom AI · Accepted Answer

Activity-based costing assigns overhead by computing a separate rate for each activity cost pool and then multiplying each rate by the job’s usage of that activity.

1) Relevant knowledge points and concepts
- Separate overhead pools: Machine Cost and Inspections Cost.
- Activity rate = Estimated overhead for pool ÷ Estimated activity driver (e.g., machine-hours or inspections).
- Total overhead allocated to a job = sum of (activity rate × job’s activity usage) across all pools.

2) Step-by-step reasoning and calculations
- Determine the machine-hour activity rate:
  Machine Cost = 400,000; Estimated machine-hours = 50,000.
  Activity rate (machine-hours) = 400,000 ÷ 50,000.
- Compute that intermediate step:
  400,000 ÷ 50,000 = 8 (dollars per machine-hour).
- Determine the inspection activity rate:
  Inspections Cost = 120,000; Estimated inspections = 3,000.
  Activity rate (inspection) = 120,000 ÷ 3,000.
- Compute that intermediate step:
  120,000 ÷ 3,000 = 40 (dollars per inspection).

3) Apply rates to Job #110 usage
- Job #110 uses 15 machine-hours → Machine overhead = 15 × 8 = 120.
- Job #110 uses 2 inspections → Inspection overhead = 2 × 40 = 80.

4) Sum the allocated overheads and explain why this is correct
- Total overhead allocated = 120 (machine) + 80 (inspection) = 200.
- This is correct because ABC’s activity-based system separately traces the two types of overhead to the job using the specific drivers and their computed per-unit rates, giving a more accurate allocation than a single pooled rate.

5) Other options (not applicable)
- If a single traditional machine-hour rate were used, the result would differ; however the question requires the ABC method shown above.

6) Conclusion
- The calculated total overhead allocated to Job #110 is 200, which matches the provided answer.

Similar Questions

Use the same information as in Question 1. The product’s direct materials cost is $18.40 per unit and its direct labor cost is $13.60 per unit. According to the activity-based costing system, the average cost per unit of product K27 is closest to:

Which is not a step in activity-based costing?

Which is not a task typically associated with ABC systems?

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