Use the information below to answer the following question(s):
Martin Corporation manufactures two products-Plows and Harrows. The annual production and sales of Plows is 1,000 units, while 2,000 units of Harrows are produced and sold. The company has traditionally used direct labour hours to allocate its overhead to products. Plows require 5.0 direct labour hours per unit, while Harrows require 2.0 direct labour hours per unit. The total estimated overhead for the period is $603,500. The company is looking at the possibility of changing to an activity-based costing system for its products. If the company used an activity-based costing system, it would have the following three activity cost pools:
Expected Activity

-The predetermined overhead allocation rate using the traditional costing system would be closest to
A) $43.20 per direct labour hour.
B) $67.06 per direct labour hour.
C) $60.30 per direct labour hour.
D) $201.17 per direct labour hour.

Question

Use the information below to answer the following question(s):
Martin Corporation manufactures two products-Plows and Harrows. The annual production and sales of Plows is 1,000 units, while 2,000 units of Harrows are produced and sold. The company has traditionally used direct labour hours to allocate its overhead to products. Plows require 5.0 direct labour hours per unit, while Harrows require 2.0 direct labour hours per unit. The total estimated overhead for the period is $603,500. The company is looking at the possibility of changing to an activity-based costing system for its products. If the company used an activity-based costing system, it would have the following three activity cost pools:
Expected Activity
 
-The predetermined overhead allocation rate using the traditional costing system would be closest to
A) $43.20 per direct labour hour. 
B) $67.06 per direct labour hour. 
C) $60.30 per direct labour hour. 
D) $201.17 per direct labour hour.

Quizplus · Accepted Answer

To calculate the predetermined overhead allocation rate using the traditional costing system, we need to divide the estimated overhead by the total direct labour hours.

Total direct labour hours = (1,000 units of Plows × 5 direct labour hours per unit) + (2,000 units of Harrows × 2 direct labour hours per unit)
= 7,000 direct labour hours

Predetermined overhead allocation rate = Estimated overhead ÷ Total direct labour hours
= $603,500 ÷ 7,000
= $86.21 per direct labour hour

Therefore, the closest answer is B) $67.06 per direct labour hour.

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