Tri-bikes manufactures two different levels of bicycles: the Standard and the Extreme. The total overhead of $300,000 has traditionally been allocated by direct labor hours, with 150,000 hours for the Standard and 50,000 hours for the Extreme.

After analyzing and assigning costs to two cost pools, it was determined that machine hours is estimated to have $200,000 of overhead, with 4,000 hours used on the Standard product and 1,000 hours used on the Extreme product.

It was also estimated that the setup cost pool would have $100,000 of overhead, with 1,000 hours for the Standard and 1,500 hours for the Extreme.

A. What is the overhead rate per product under Traditional costing?

What is the overhead rate under Absorption Costing for:

B. The machine pool overhead rate

C. The setup pool overhead rate

Instructions are listed below.

Explanation:

Giving the following information:

Estimated costs and direct labor hours:

The total overhead = $300,000

Standard = 150,000 hours

Extreme = 50,000 hours

1) Under traditional costing, overhead gets allocated using a single plantwide manufacturing overhead rate.

To calculate the estimated manufacturing overhead rate we need to use the following formula:

Estimated manufacturing overhead rate = total estimated overhead costs for the period / total amount of allocation base

Estimated manufacturing overhead rate = 300,000/200,000 = $1.5 per direct labor hour

Now, we can allocate overhead to each product:

Allocated MOH = Estimated manufacturing overhead rate * Actual amount of allocation base

Standard = 1.5*150,000 = $225,000

Extreme = 1.5*50,000 = $75,000

2) Machine:

Overhead = $200,000

Hours = 4,000 hours used on the Standard product and 1,000 hours used on the Extreme product.

Estimated manufacturing overhead rate = 200,000/5,000 = $40 per hour

3) Set up:

Overhead = $100,000

Hours = 1,000 hours for the Standard and 1,500 hours for the Extreme.

Estimated manufacturing overhead rate = 100,000/2,500 = $40