Problem: Fontillas Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $89,500 were estimated. An analysis of estimated overhead costs reveals the following activities.
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Activities
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Cost Drivers
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Total Cost
|
|
1. Materials handling
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Number of requisitions
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$35,000
|
|
2. Machine setups
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Number of setups
|
27,500
|
|
3. Quality inspections
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Number of inspections
|
27,000
|
The cost driver volume for each product was as follows:
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Cost Drivers
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Instruments
|
Gauges
|
Total
|
|
Number of requisitions
|
400
|
600
|
1,000
|
|
Number of setups
|
200
|
300
|
500
|
|
Number of inspections
|
200
|
400
|
600
|
Instructions:
a. Determine the overhead rate for each activity.
b. Assign the manufacturing overhead costs for April to the two products using activity-based costing.
c. Write a memorandum to the president of Fontillas Instrument explaining the benefits of activity-based costing.