Question:
EB8.
LO 6.3Rocks Industries has identified three different activities as cost drivers: machine setups, machine hours, and inspections. The overhead and estimated usage are:
Activity Overhead per Activity Annual Usage
Machine Setups $75,000 6,000
Machine Hours $85,002 5,484
Inspections $70,000 20,000
Compute the overhead rate for each activity.
Answer:
Following two steps helps in finding the Overhead Rate for every activity.
Step 1: Identify cost pools and their relevant cost drivers.
Cost Driver Cost pool
Machine Setups $75,000
Machine Hrs $85,002
Inspection $70,000
Step 2: Calculate Overhead rate for each activity
Overhead Rate= Cost pool / total units of relevant cost driver consumed
Now just put the values in the formula and compute overhead rate for each overhead.
Overhead Rate for machine setup=$75,000 / 6,000 total setups= $12.5 per setup
Overhead Rate for Machine cost=$85,002 / 5,484 total Machine hrs= $15.5 per machine hr
Overhead Rate for Inspection cost=$70,000 / 20,000 total Inspections= $3.5 per Inspection
