Accounting: Cost Calculations

Ken’s Carpets sells carpet for both residential and business use. To better estimate costs, the company recently adopted an activity-based costing system. Last year, the company incurred $300,000 in overhead costs. Based on an intense study of their company, the following activities, allocation bases, and percentages of overhead costs were determined:

The Proportion of Overhead Cost
Activity
Allocation Base

25%
Purchasing
Number of purchase orders

50%
Materials processing
Number of square feet

25%
Sales
Number of sales orders

The number of activities for residential and business is as follows:

Business
–
Residential
–
Total
Total Overhead

500
–
700
Number of purchase orders
1,200
75,000

2,000,000
–
4,000,000
Number of square feet
6,000,000
150,000

100
–
400
Number of sales orders
500
75,000

 

Required:
 –
 –

A.
Calculate the total overhead that should be allocated to each of the three activities

 –
Number of Purchase
$75,000

 –
Number of square feet
$150,000

 –
Number of sales orders
$75,000.

B.
Calculate the overhead rates for each of the three activities.

 –
Number of purchase
62. 5

 –
Number of square feet
0. 025

 –
Number of sales orders
150

C.
If a particular residential job requires 4 purchase orders and 1 sales order for total of 1,500 square feet of carpet, how much overhead should be allocated to the job?

 –
4*62. 5 + 0. 025*1,500+1*150 = $437. 50

2. Mountaineer Tents manufactures and sells heavy and light-duty tents to various outdoor retailers. To better estimate costs, the company recently adopted an activity-based costing system.
Last year, the company incurred $900,000 in overhead costs. Based on an intense study of their company, the following activities, allocation bases, and percentages of overhead costs were determined:

Activity
Allocation Base
The Proportion of Overhead Cost

Purchasing
Number of purchase orders
55%

Inspections
Number of inspections
20%

Sales
Number of sales orders
25%

 

The number of activities for heavy and light duty tents is as follows:
Heavy-duty
Light-duty

Number of purchase orders
5,000
4,000

Number of inspections
3,000
1,000

Number of sales orders
800
400

 

Required:
 –
 –

A.
 Calculate the total overhead that should be allocated to each of the three activities

 –
Number of purchase
 4,950

 –
Number of inspection
800

 –
Number of sales
300

B.
 Calculate the overhead rates for each of the three activities.

 –
Number of purchase
1. 82

 –
Number of inspection
5

 –
Number of sales
4

C.
If a single sales order requires 10 purchase orders and 30 inspections to fill, how much overhead should be applied to the order?

 –
1*4+10*1. 82+30*5 = 191. 82

3. The following overhead cost information is available for Millennium Inc. for 2006:

Activity
Allocation Base
Overhead Cost

Purchasing
Number of purchase orders
$300,000

Machine setups
Number of setups
150,000

Quality control
Number of inspections
50,000

During the year, 4,000 purchase orders were issued; 8,000 machine setups were performed, and 2,000 inspections were conducted.

Required:
 –
 –

A.
Calculate the overhead rates for each of the three activities

 –
Purchasing
75. 00

 –
Machine Setups 800
18.75

 –
Quality Control
25

B.
If a particular job requires 10 purchase orders, 6 setups, and 5 inspections to fill, how much overhead should be applied to the job?

 –
10*75+6*18. 75+25*5 = 987. 5