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Now it's your turn.

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

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

Here's the information.

A company makes two types of Go-Karts,

a basic version and a deluxe version.

It's expecting to make 5,000 basic,

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

And to allocate manufacturing overhead,

it uses an activity-based costing system with

three cost pools and their associated cost drivers.

So the cost pools or the cost of equipment,

which might be depreciation,

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

So we have three cost pools.

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

How many hours the machines are being run?

The setup of the machines and

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

and the receiving and handling of materials is driven

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

We have information for the basic Go-Kart and the

deluxe Go-Kart for each of those cost drivers.

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

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

The basic and the deluxe.

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

Take a few minutes, give it a try,

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

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

Okay, back at the light board,

having a great time.

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

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

We have three cost pools,

we have the cost driver,

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

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

So we have our three pools here.

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

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

So our expected overhead $70,000,

and the cost driver's machine hours,

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

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

Now let's move to setup.

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

The driver, cost driver,

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

So our allocation rate would be,

let's say, $100 per setup.

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

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

And the cost drivers,

the number of parts,

we're expecting 130,000 parts.

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

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

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

to the basic and the deluxe Go-Kart models.

So our basic model,

let's start with the equipment cost pool.

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

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

And then we have all of that,

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

that we expect to have to get

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

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

Yes, so we're allocating

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

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

Still the same thing for the deluxe model.

Deluxe model we've, again,

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

and we're expecting 1,000 machine hours.

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

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

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

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

And of course, that makes sense.

Sometimes, it's nice to make

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

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

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

so we're right on track.

So $20 per machine hour,

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

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

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

Perfect.

Now, let's move to setup.

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

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

How many setups are we expecting?

A hundred for the basic model,

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

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

$100 per setup times the number of setups,

200 setups, and that's 1,000 units.

And so, if we take a look at this,

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

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

That makes sense because the total that's being

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

Things are working out great.

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

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

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

and so each unit is going to be

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

All right, great! We're on a roll,

let's go to receiving and handling.

We've got 30 cents per part.

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

and of course, 5,000 units.

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

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

divided by the 1,000 units.

That would give us a, let's see,

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

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

Looking good. If we total these,

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

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

Is that making sense?

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

but it's using a lot of activity compared to

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