Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 49 range instruments and 297 pressure gauges were produced, and overhead costs of $88,560 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities Cost Drivers Total Cost
1. Materials handling Number of requisitions $38,850
2. Machine setups Number of setups 26,190
3. Quality inspections Number of inspections 23,520
$88,560
The cost driver volume for each product was as follows.
Cost Drivers Instruments Gauges Total

Number of requisitions 420 630 1,050
Number of setups 225 260 485
Number of inspections 265 225 490
Determine the overhead rate for each activity.
Overhead Rate
Materials handling $
Machine setups $
Quality inspections $
Assign the manufacturing overhead costs for April to the two products using activity-based costing.
Instruments Gauges
Total cost assigned $ $
Overhead cost per Unit $ $

Answer and Explanation:

1. The computation of overhead rate for each activity is shown below:-

Overhead rate for each activity            Overhead Rate

Materials handling                                      37

                                                             ($38,850 ÷ 1,050)

Machine setups                                           54

                                                              ($26,190 ÷ 485)

Quality inspections                                      48

                                                               (23,520 ÷ 490)

2. The computation of assignment of manufacturing overhead costs for April to the two products using activity-based costing is shown below:-

Assignment of           Instruments                         Gauges

manufacturing

overhead costs

Materials handling   $37 × 420   $15,540  $37 × 63 $23,310

Machine setups      $54 × 225    $12,150   $54 × 260 $14,040

Quality inspections $48 × 265   $12,720   $48 × 225  $10,800

Total cost assigned                     $40,410                     $48,150

Overhead cost

per Unit          $40,410 ÷ 49  $824.69 $48,150 ÷ 297 $162.12

Therefore we have applied the above formula.

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