Question

Xie Company identified the following activities, costs, and activity drivers for 2017. The company manufactures two types of go-karts: deluxe and basic.

Activity	Expected Costs	Expected Activity
Handling materials	$625,000	100,000 parts
Inspecting product	900,000	1,500 batches
Processing purchase orders	105,000	700 orders
Paying suppliers	175,000	500 invoices
Insuring the factory	300,000	40,000 square feet
Designing packaging	75,000	2 models

Required

1. Compute a single plant wide overhead rate, assuming that the company assigns overhead based on 125,000 budgeted direct labor hours.
2. In January 2017, the deluxe model required 2,500 direct labor hours and the basic model required 6,000 direct labor hours. Assign overhead costs to each model using the single plant wide overhead rate.

Short answer

1. Plantwide overhead rate = $17.44
2. Overhead costs for the deluxe and basic models are $43,600and $104,600.

Step-by-step solution

(1) Calculating Plantwide overhead rate

$\begin{array}{rcl}\mathbf{Plantwide}\mathbf{}\mathbf{overhead}\mathbf{}\mathbf{rate}& \mathbf{=}& \frac{\mathbf{Estimated}\mathbf{}\mathbf{overhead}\mathbf{}\mathbf{cost}}{\mathbf{Estimated}\mathbf{}\mathbf{direct}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{hours}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{180}\mathbf{,}\mathbf{000}}{\mathbf{125}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{17}\mathbf{.}\mathbf{44}\mathbf{}\mathbf{per}\mathbf{}\mathbf{direct}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{hour}\end{array}$

(2) Computing overhead cost

Computing overhead costs for the deluxe model

$\begin{array}{rcl}\mathbf{Overhead}\mathbf{ }\mathbf{cost}& \mathbf{=}& \mathbf{Total}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{hour}\mathbf{\times }\mathbf{Plantwide}\mathbf{}\mathbf{overhead}\mathbf{}\mathbf{rate}\\ & \mathbf{=}& \mathbf{2}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{\$}\mathbf{17}\mathbf{.}\mathbf{44}\\ & \mathbf{=}& \mathbf{\$}\mathbf{43}\mathbf{,}\mathbf{600}\end{array}$

Computing overhead costs for the basic model

$\begin{array}{rcl}\mathbf{Overhead}\mathbf{ }\mathbf{cost}& \mathbf{=}& \mathbf{Total}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{hour}\mathbf{\times }\mathbf{Plantwide}\mathbf{}\mathbf{overhead}\mathbf{}\mathbf{rate}\\ & \mathbf{=}& \mathbf{6}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{17}\mathbf{.}\mathbf{44}\\ & \mathbf{=}& \mathbf{\$}\mathbf{104}\mathbf{,}\mathbf{640}\end{array}$