Berk Company produces three products: Tic, Tac, and Toe. Tic requires 160 machine setups, Tac requires 150 setups, and Toe requires 190 setups. Berk has identified an activity cost pool with allocated overhead of $32,000 for which the cost driver is machine setups. How much overhead is assigned to the Tic product?

Question

Allan Flynn

Business

6 September, 22:42

Berk Company produces three products: Tic, Tac, and Toe. Tic requires 160 machine setups, Tac requires 150 setups, and Toe requires 190 setups. Berk has identified an activity cost pool with allocated overhead of $32,000 for which the cost driver is machine setups. How much overhead is assigned to the Tic product?

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Graham Rich · Answer 1

Overhead assigned to Tic = $10,240

Explanation:

Activity-based costing is a form of absorption costing where overheads are charged to product using cost drivers.

Under this method, overheads are first analyzed and categorized by the activities responsible for them and then charged to product based on the amount of benefits enjoyed using cost drivers.

Activity rate per driver is calculated as:

Activity overhead for the period / Total cost drivers for the period

Set - up activity overhead = $32,000

Total expected cost drivers for activity set up = sum of the set ups for the three products

Total set ups = 160 + 150 + 190 = 500 set ups

Overhead rate per set up

= $32,000/500 set ups

= $64 per set up

Overhead assigned to Tic = Overhead rate per set up * No of setups for TIC

= $64 per setup * 160=$10,240

Overhead assigned to Tic = $10,240