Question - Isadore's Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an activity-based costing system using the following data:
Cost Driver Volume
Activity Cost Driver Cost Pencils Pens
Setting up Number of setups $ 113,400 23 31
Inspecting Number of parts 28,000 3 7
Packing and shipping Number of boxes shipped 52,000 45,000 85,000
Total overhead $ 193,400
Required:
(a) Compute the amount of overhead to be allocated to each product under activity-based costing.
(b) Compute the amount of overhead to be allocated to each product using labor-hours as the allocation base. Assume that the number of labor-hours required to assemble each box is 0.2 for pencils and 0.2 for pens and that 45,000 boxes of pencils and 85,000 boxes of pens were produced during the period.