Activity Rates

Full Answer Section

Decal application:

• Total budgeted overhead cost: $492,000 * 10% = $49,200
• Budgeted number of decals applied: 197,000
• Activity rate: $49,200 / 197,000 = $0.25 per decal applied (rounded to nearest cent)

Castle Dale Company: Comparison of ABC and Plantwide Overhead

1. Activity Rates:

a) Setting up equipment:

• Total budgeted cost: $660,000
• Budgeted setup hours: 12,000 + 3,000 = 15,000 hours
• Activity rate: $660,000 / 15,000 hours = $44 per setup hour

b) Other overhead:

• Total budgeted cost: $2,376,000
• Budgeted oven hours: 2,200 + 15,400 = 17,600 hours
• Activity rate: $2,376,000 / 17,600 hours = $135 per oven hour

2. Total Overhead for Fudge:

• Setting up equipment: 16,000 batches * $44/batch = $704,000
• Other overhead: 2,200 hours * $135/hour = $297,000
• Total overhead: $704,000 + $297,000 = $1,001,000

3. Unit Overhead for Fudge:

• Total overhead: $1,001,000
• Batches produced: 16,000
• Unit overhead: $1,001,000 / 16,000 = $62.56 per unit (rounded to nearest cent)

4. Plantwide Overhead Rate:

• Total budgeted overhead: $660,000 + $2,376,000 = $3,036,000
• Budgeted oven hours: 17,600 hours
• Plantwide overhead rate: $3,036,000 / 17,600 hours = $172.44 per oven hour (rounded to nearest cent)

5. Total Overhead for Fudge using Plantwide Rate:

• Oven hours: 2,200 hours
• Plantwide overhead rate: $172.44/hour
• Total overhead: 2,200 hours * $172.44/hour = $377,568

6. Comparison of Overhead Assignments:

a) Reason for difference:

The difference in total overhead assigned to Fudge between the ABC system and the plantwide method is primarily due to the different treatment of setup costs. The ABC system assigns a significant portion of overhead to Fudge based on its setup hours, while the plantwide method simply spreads the total overhead cost evenly across all units based on oven hours. This results in Fudge being assigned more overhead under the ABC system because it requires more setup time per unit.

b) Difference in total overhead:

• ABC system: $1,001,000
• Plantwide system: $377,568
• Difference: $623,432

In conclusion, the ABC system provides a more accurate allocation of overhead costs to products based on their actual consumption of resources, particularly relevant for products with significant differences in setup times.

Sample Solution

1. Calculating Activity Rates:

a) Plastic injection molding:

• Total budgeted overhead cost: $492,000 * 90% = $442,800
• Budgeted pounds of plastic molded: 1,940,000 pounds
• Activity rate: $442,800 / 1,940,000 pounds = $0.23 per pound molded (rounded to nearest cent)