As a result, management is considering moving from a direct-labor based overhead rate to an activity-based costing system. The controller has chosen the following activity cost pools and cost drivers for factory overhead: Overhead-purchase orders, Cost info $200,000 Cost driver-Number of orders, driver activity 25,000. Overhead-Setup costs, Cost info 300,000, cost driver-Number of tests, Driver activity 15,000. Overhead-Testing costs, Cost info 420,000, Cost driver-Number of tests, Driver activity 16,000. Overhead-Machine maintenance, Cost info 800,000, Cost driver Machine hours, Driver activity 50,000
A. Calculate the overhead rate for each cost driver.
B. An order for 50 ceramic dish sets had the following requirements: Number of purchase orders 3, Number of setups 20, Number of product tests 7, Machine hours 150 How much overhead should be assigned to this order?
C. Would you except the new activity-based system to allocate a different amount of overhead?
D. Discuss why using an activity-based system could provide better information to decision makers regarding the setting of sales prices. What other advantages might David Meyers, Inc. realize from the new costing system?