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 |
