Problem:
The HITEC Company manufactures multimedia equipment designed to be sold to universities. The company’s southeastern plant has undergone production changes that have resulted in decreased usage of direct labor and increased usage of automated processes. As a result, management no longer believes that its overhead allocation method is accurate and is considering changing from a traditional overhead allocation to an activity-based method. The controller has chosen the following activity centers and costs drivers for overhead:
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Overhead Cost Information
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Purchase orders
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$200,000
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Setup Costs
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300,000
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Testing costs
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420,000
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Machine maintenance
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800,000
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Cost Driver
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Driver Activity
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Number of orders
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25,000
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Number of setups
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15,000
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Number of tests
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16,000
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Machine hours
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50,000
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Required to do:
A. Calculate the overhead rate each cost driver
B. An order for 1,000 video projectors had the following requirement
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Number of purchase orders
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3
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Number of setups
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5
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Number of product tests
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20
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Machine hours
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1,500
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How much total overhead should be assigned to this order?
What could management do to reduce the overhead costs assigned to these video projectors? What would be the impact on the net income of reducing overhead assigned to the video projectors?