Rustafson Corporation is a diversified manufacturer of consumer goods. The company's activity-based costing system has the following seven activity cost pools: Activity Cost Pool Estimated Overhead Cost Expected Activity
Labor-related $31,200 5,000 direct labor-hours
Machine-related $1,250 5,000 machine-hours
Machine setups $36,000 1,200 setups
Production orders $18,000 500 orders
Product testing $22,000 1,100 tests
Packaging $42,900 3,900 packages
General factory $56,000 5,000 direct labor-hours

Required:
a. Compute the activity rate for each activity cost pool.
b. Compute the company's predetermined overhead rate, assuming that the company uses a single plantwide predetermined overhead rate based on direct labor-hours.

Answer and Explanation:

a. The computation of activity rate for each activity cost pool is shown below:-

Activity cost     Estimated      Expected     Activity

pool                   overhead      Activity          Rate

                              cost

                               a                  b                a ÷ b

Labor-related     $31,200        5,000           $6.24

Machine-related $1,250          5,000           $0.25

Machine setups $36,000       1,200             $30

Production orders $18,000      500             $36

Product testing      $22,000     1,100           $20

Packaging               $42,900     3,900         $11

General factory      $56,000      5,000         $11.2

Total                       $207,350                      

b. The computation of company's predetermined overhead rate is shown below:-

Company's predetermined overhead rate = Total estimated overhead cost ÷ Total expected direct labor hours

= $207,350 ÷ 5,000

= $41.47