Hollywood Company has identified the following overhead costs and the cost drivers for the year 2011.
Overhead item Estimated cost Cost driver Estimated driver
Setup costs $960,000 Number of setups 4,800 setups
Ordering costs $160,000 Number of orders 20,000 orders
Maintenance $640,000 Machine hours 64,000 machine hours
Power $80,000 Kilowatt hours 200,000 kilowatt hours
(a) Determine the overhead rate per driver for each of the overhead items identified.
(b) Assume that the company absorbed overhead using labour hours. What would have been the overhead rate if the company estimated 40,000 labour hours in 2011?
(c) You have the following information on Project 101. The company used 180 labour
hours to complete this project. How much overhead would you allocate using labour
hours?
(d) On further scrutiny you find that Project 101 used 12 setups, 16 orders, 360 machine hours and 180 kilowatt hours to complete. How much overhead would be allocated to Project 101, assuming the Activity-Based Costing (ABC) technique is used?
(e) List and briefly discuss two (2) advantages and two (2) disadvantages of using ABC.