EB10.

LO 6.3Frenchy’s has three cost pools and an associated cost driver to allocate the costs to the product. The cost pools, cost driver, estimated overhead, and estimated activity for the cost pool are:

What is the predetermined overhead rate for each activity?

The question is incomplete; the complete question is given below.

Cost Pool Cost Driver Estimated Cost Driver Estimated Overheads

Material Material requisition 250,000.00 $105,000.00

Machining Machine hours 360, 750 $432,900.00

Inspection Number of inspections 25,000.00 $15,750.00

Answer:

Overhead rate per activity : Material - $0.42, Machining-$1.2, Inspection-$6.3

Explanation:

Activity-based costing aims to achieve better product pricing than traditional absorption cost by charging overheads to the product cost more accurately.

Activity-based costing uses cost drivers to charge overheads to cost unit as against the use of of volume-based bases like labour hours, machine hours. Overheads are first traced to the activities responsible for them - the sum is called cost pool. Cost pools are then absorbed into the cost unit using cost driver rates

Cost pool - the sum of the total overheads associated with an activity. E. g $105,000 material requisition overheads.

Cost driver: A factor that causes a change in the cost pool. E. g

250,000 material requisitions.

Cost per driver: A specific overhead absorption rate computed for an activity. It is calculated as follows:

Cost per driver = Estimated activity overheads/Total number of cost drivers

The predetermined overhead rate for each activity is calculated as follow;

Material requisition = $105,000/250,000 requisitions = $0.42 per requisition

Machining = $432,900/360,750 machine hours = $1.2 per machine hour

Inspection = $15,750 / 25,000 inspections = $6.3 per inspection