Problem - Fontillas Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $89,500 were estimated. An analysis of estimated overhead costs reveals the following activities.
Activities Cost Drivers Total Cost
1. Materials handling Number of requisitions $35,000
2. Machine setups Number of setups 27,500
3. Quality inspections Number of inspections 27,000
The cost driver volume for each product was as follows.
Cost Drivers Instruments Gauges Total
Number of requisitions 400 600 1,000
Number of setups 200 300 500
Number of inspections 200 400 600
Instructions
(a) Determine the overhead rate for each activity.
(b) Assign the manufacturing overhead costs for April to the two products using activity based costing.
(c) Write a memorandum to the president of Fontillas Instrument explaining the benefits of activity-based costing.