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Now it's your turn.

Â I'm going to give you the opportunity to calculate overhead rates and allocate

Â overhead to some products using an activity-based costing system.

Â Here's the information.

Â A company makes two types of Go-Karts,

Â a basic version and a deluxe version.

Â It's expecting to make 5,000 basic,

Â and 1,000 deluxe Go-Karts in the upcoming year.

Â And to allocate manufacturing overhead,

Â it uses an activity-based costing system with

Â three cost pools and their associated cost drivers.

Â So the cost pools or the cost of equipment,

Â which might be depreciation,

Â the setup of machines and the receiving and handling of materials.

Â So we have three cost pools.

Â And the company feels like that the cost of equipment is driven by machine hours.

Â How many hours the machines are being run?

Â The setup of the machines and

Â its associated costs is driven by how many times they have to set them up,

Â and the receiving and handling of materials is driven

Â by how many parts that they're doing that activity for.

Â We have information for the basic Go-Kart and the

Â deluxe Go-Kart for each of those cost drivers.

Â So I'm asking you to figure out what is the allocation rate for each cost pool?

Â And then, how much of the total overhead cost will be allocated to each product line?

Â The basic and the deluxe.

Â And then, what is the overhead cost per unit for the basic model and the deluxe model?

Â Take a few minutes, give it a try,

Â then come back and we'll see how you did.

Â I'll be waiting for you over on the light board where we could do a lot of work.

Â Okay, back at the light board,

Â having a great time.

Â We're going to use activity-based costing concepts to allocate

Â overhead cost to the basic and deluxe Go-Kart models.

Â We have three cost pools,

Â we have the cost driver,

Â we know how much of the cost driver basic and deluxe models use,

Â and so we'll use all this information to do our allocations.

Â So we have our three pools here.

Â Let's calculate our allocation rate for each of our cost pools.

Â With the equipment, we have a cost pool that totals $70,000.

Â So our expected overhead $70,000,

Â and the cost driver's machine hours,

Â the total machine hours that we're expecting is 3500.

Â And so that would make an allocation rate of $20 per machine hour.

Â Now let's move to setup.

Â Setup, we have a cost pool that's $30,000.

Â The driver, cost driver,

Â is the number of setups we would expect a total of 300 setups.

Â So our allocation rate would be,

Â let's say, $100 per setup.

Â And now, we're in the receiving and handling,

Â and we have an overhead cost of 39,000 in that cost pool.

Â And the cost drivers,

Â the number of parts,

Â we're expecting 130,000 parts.

Â So that gives us a rate of 30 cents per part.

Â So we've got our allocation rates for each of our cost pools,

Â now let's take those rates and allocate the overhead in each pool

Â to the basic and the deluxe Go-Kart models.

Â So our basic model,

Â let's start with the equipment cost pool.

Â We're going to allocate $20 per machine hour.

Â And we're expecting 2,500 machine hours for basic.

Â And then we have all of that,

Â we're going to be dividing by the total number of basic Go-Karts

Â that we expect to have to get

Â a per unit amount for what's allocated to the basic Go-Kart,

Â and that would be let's say I believe that's a $10 per Go-Kart.

Â Yes, so we're allocating

Â $5,000 in total overhead that's being incurred by the basic model,

Â and we're dividing that by our 5,000 unit.

Â Still the same thing for the deluxe model.

Â Deluxe model we've, again,

Â we're going to allocate $20 per machine hour,

Â and we're expecting 1,000 machine hours.

Â So we would be allocating to $20,000 here.

Â I'm just noticing here that I said 5,000 here,

Â but I believe we're looking at $50,000 that get allocated to the basic model,

Â and 20,000 of that gets allocated to the deluxe model.

Â And of course, that makes sense.

Â Sometimes, it's nice to make

Â a little mess up because you can actually learn something from it.

Â The 50,000 that goes to basic plus the 20,000 that

Â goes to deluxe would give us our 70,000 in the cost pool,

Â so we're right on track.

Â So $20 per machine hour,

Â and we're expecting 1,000 machine hours for the deluxe model,

Â and there's a 1,000 units that we are expecting to make.

Â And so that would give us $20 per deluxe model.

Â Perfect.

Â Now, let's move to setup.

Â Setup, we've got a rate of $100 per setup.

Â So let's see what we're going to allocate to the basic model.

Â How many setups are we expecting?

Â A hundred for the basic model,

Â and then that's going to be spread over the 5,000 units.

Â And then, let's move over here to the deluxe model and do something similar.

Â $100 per setup times the number of setups,

Â 200 setups, and that's 1,000 units.

Â And so, if we take a look at this,

Â that's going to be 10,000 that gets allocated over to the basic product line,

Â and that's going to be 20,000 that gets allocated over to the deluxe line.

Â That makes sense because the total that's being

Â allocated is the $30,000 from our cost pool.

Â Things are working out great.

Â And so that puts us at two dollars per unit here for the basic model,

Â and it puts us at $20 per unit for the deluxe model.

Â A lot more setups going to the deluxe model for a lot fewer number that we're making,

Â and so each unit is going to be

Â allocated a lot more setup costs than for the basic model.

Â All right, great! We're on a roll,

Â let's go to receiving and handling.

Â We've got 30 cents per part.

Â And we've got 100,000 parts that we're expecting to use for the basic model,

Â and of course, 5,000 units.

Â We'll do the same thing over here for our deluxe model.

Â Thirty cents per part times the number of parts, 30,000,

Â divided by the 1,000 units.

Â That would give us a, let's see,

Â I believe that's six dollars for the basic model,

Â and then that would be nine dollars for the deluxe model.

Â Looking good. If we total these,

Â it looks like the deluxe model is going to be allocated a total of $49 in overhead,

Â and it looks like the basic model is going to be allocated a total of $18 an overhead.

Â Is that making sense?

Â Probably so, because we have a deluxe model that we're selling a lot fewer units of,

Â but it's using a lot of activity compared to

Â the basic model that we're selling a whole lot more units to.

Â