ltan Company uses an activity-based costing system. At the beginning of the year, the company made the following estimates of cost and activity for its five activity cost pools: Activity Cost Pool Activity Measure Expected Overhead Cost Expected Activity Labor-related Direct labor-hours $ 156,000 26,000 DLHs Purchase orders Number of orders $ 11,000 220 orders Parts management Numbe
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Exercise 4-5 (Static) Assigning Overhead to Products in ABC [LO4-2, LO4-3]
| Activity Cost Pool | Activity Measure | Expected Overhead Cost | Expected Activity | |
|---|---|---|---|---|
| Labor-related | Direct labor-hours | $ 156,000 | 26,000 | DLHs |
| Purchase orders | Number of orders | $ 11,000 | 220 | orders |
| Parts management | Number of part types | $ 80,000 | 100 | part types |
| Board etching | Number of boards | $ 90,000 | 2,000 | boards |
| General factory | Machine-hours | $ 180,000 | 20,000 | MHs |
Required:
1. Compute the activity rate for each of the activity cost pools.
2. The expected activity for the year was distributed among the company’s four products as follows:
| Activity Cost Pool | Expected Activity | |||
|---|---|---|---|---|
| Product A | Product B | Product C | Product D | |
| Labor-related (DLHs) | 6,000 | 11,000 | 4,000 | 5,000 |
| Purchase orders (orders) | 60 | 30 | 40 | 90 |
| Parts management (part types) | 30 | 15 | 40 | 15 |
| Board etching (boards) | 500 | 900 | 600 | 0 |
| General factory (MHs) | 3,000 | 8,000 | 3,000 | 6,000 |
Using the ABC data, determine the total amount of overhead cost assigned to each product.
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