Simpson Co. currently manufactures easy chairs and recliners. It currently uses

Question

Simpson Co. currently manufactures easy chairs and recliners. It currently uses a traditional costing system with direct labor hours as the activity to allocate overhead costs to both products. Simpson’s total overhead costs are $40,000. The total direct labor hours are 5,000 (2,700 hrs. for easy chairs and 2,300 for recliners).

Management is considering switching to the ABC system and has identified the following activities and related drivers:

Using an ABC costing system, the overhead rate for Machine Setups would be $  per setup and the overhead rate for Inspections would be $  per inspection.

The TOTAL Overhead Assigned to EASY CHAIRS under ABC would be $ .

Activities Driver Estimated Overhead Total Expected Use of Drivers Expected Use of Drivers by Product Easy Chairs Recliners Machine Setups # of setups $17,500 1,000 700 300 Inspections # of inspections $22,500 750 600 150 $40,000

Explanation / Answer

Using an ABC costing system, the overhead rate for Machine Setups would be (17500/1000) $17.50 per setup and the overhead rate for Inspections would be (22500/750) $30  per inspection.

The TOTAL Overhead Assigned to EASY CHAIRS under ABC would be (17.5*700+30*600) = $30250

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