Use the information below to answer the following question(s):
Kepple Manufacturing currently uses a traditional costing system. The company allocates overhead to its two products, Zips and Dees, using a predetermined manufacturing overhead rate based on direct labour hours. Here is data related to the company's two products:
Information about the company's estimated manufacturing overhead for the year follows:
Additional information about production needed for the activity-based costing system follows:
Expected Activity

-The amount of manufacturing overhead that would be allocated to one unit of Zips using an activity-based costing system would be closest to
A) $32.86.
B) $51.12.
C) $64.81.
D) $11.95.

Question

Use the information below to answer the following question(s):
Kepple Manufacturing currently uses a traditional costing system. The company allocates overhead to its two products, Zips and Dees, using a predetermined manufacturing overhead rate based on direct labour hours. Here is data related to the company's two products:
  Information about the company's estimated manufacturing overhead for the year follows:
  Additional information about production needed for the activity-based costing system follows:
Expected Activity
 
-The amount of manufacturing overhead that would be allocated to one unit of Zips using an activity-based costing system would be closest to
A) $32.86. 
B) $51.12. 
C) $64.81. 
D) $11.95.

Quizplus · Accepted Answer

Under the traditional costing system, Kepple Manufacturing allocates manufacturing overhead based on direct labor hours. The total estimated manufacturing overhead for the year is $394,200, and the total estimated direct labor hours for the year is 16,300. This gives us a predetermined manufacturing overhead rate of $24.20 per direct labor hour ($394,200 ÷ 16,300).

To allocate manufacturing overhead to the two products under the traditional costing system, we need to calculate the total direct labor hours for each product and then use the predetermined rate to allocate overhead. From the data provided, we know that Zips requires 0.25 direct labor hours per unit and Dees requires 0.50 direct labor hours per unit.

For Zips: 
Manufacturing overhead per unit = 0.25 × $24.20 = $6.05

For Dees:
Manufacturing overhead per unit = 0.50 × $24.20 = $12.10

Total cost per unit (including direct materials, direct labor, and allocated overhead) for Zips = $20.00 + $10.00 + $6.05 = $36.05
Total cost per unit (including direct materials, direct labor, and allocated overhead) for Dees = $25.00 + $20.00 + $12.10 = $57.10

Under the activity-based costing system, we need to identify the cost drivers for each type of overhead and then allocate those costs based on the amount of each cost driver used by each product. The cost drivers and their expected activity levels for each type of overhead are provided in the additional information.

For Zips: 
The total expected cost for each type of overhead is calculated as follows:
Machining = $102,000 × 500 / 4,000 = $12,750
Setup = $50,000 × 400 / 1,000 = $20,000
Material handling = $48,000 × 10,000 / 50,000 = $9,600

Total overhead cost for Zips = $12,750 + $20,000 + $9,600 = $42,350
Total expected production for Zips = 500 + 1,000 = 1,500 units

Manufacturing overhead per unit = $42,350 ÷ 1,500 = $28.23

For Dees:
The total expected cost for each type of overhead is calculated as follows:
Machining = $102,000 × 2,500 / 4,000 = $63,750
Setup = $50,000 × 600 / 1,000 = $30,000
Material handling = $48,000 × 50,000 / 50,000 = $48,000

Total overhead cost for Dees = $63,750 + $30,000 + $48,000 = $141,750
Total expected production for Dees = 2,500 units

Manufacturing overhead per unit = $141,750 ÷ 2,500 = $56.70

Therefore, the amount of manufacturing overhead that would be allocated to one unit of Zips using an activity-based costing system is $28.23 per unit, which is closest to choice B, $51.12.

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