Paul’s Pipes manufactures custom pipe fittings. Total manufacturing overhead cos
ID: 2565462 • Letter: P
Question
Paul’s Pipes manufactures custom pipe fittings. Total manufacturing overhead costs were $10,000,000. In the past Paul allocated costs using a simple absorption costing system using machine-hours as the driver. However, Paul is now considering switching to an activity-based costing system. He has determined that the total manufacturing overhead cost is a mixture of machine-level, unit-level, product-level, and batch-level costs. Paul has prepared the following information regarding manufacturing costs and driver usage.
Total Manufacturing Overhead Costs
Expected Driver Usage
Machine-level costs
$4,000,000
40,000 hours
Unit-level costs
2,000,000
8,000,000 units
Batch-level costs
3,000,000
1,500 batches
Product-line costs
1,000,000
40 lines
10,000,000
The Household Plumbing division used 1,000 machine hours, produced 2,000,000 units, ran 49 batches, and encompasses 8 product lines. What was the reported overhead cost applied to the Household Plumbing division under the old system?
Total Manufacturing Overhead Costs
Expected Driver Usage
Machine-level costs
$4,000,000
40,000 hours
Unit-level costs
2,000,000
8,000,000 units
Batch-level costs
3,000,000
1,500 batches
Product-line costs
1,000,000
40 lines
10,000,000
Explanation / Answer
In the old system, total manufacturing overhaed costs of 10,000,000 were allocated using absorption costing system using machine hours as the cost driver.
Total Machine hours = 40,000
Predetermined Overhead rate = Manufacturing overhead costs / Total machine hours = 10,000,000 / 40,000 = 250
Machine hours used by the household plumbing division = 1,000 machine hours
Overhead cost applied to the Household Plumbing division under the old system = Machine hours used * Predetermined overhead rate = 1,000 * 250 = 250,000.