Betterton Corporation uses an activity based costing system to assign overhead costs to products. In the first stage, two overhead costs—equipment depreciation and supervisory expense-are allocated to three activity cost pools—Machining, Order Filling, and Other—based on resource consumption. Data to perform these allocations appear below: Overhead costs:
Equipment depreciation $ 49,000
Supervisory expense $ 3,000
Distribution of Resource Consumption Across Activity Cost Pools:
Activity Cost Pools
Machining Order Filling Other
Equipment depreciation 0.50 0.30 0.20
Supervisory expense 0.10 0.40 0.50
In the second stage, Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow:
Activity: Activity:
MHs (Machining) Orders (Order Filling)
Product A8 3,000 500
Product K2 17,000 1,500
Total 20,000 2,000
What is the overhead cost assigned to Product A8 under activity-based costing?

$7,695

Explanation:

The computation of overhead cost assigned to Product A8 under activity-based costing is shown below:-

Overhead  Amount  Machining Amount  Order Amount Other Amount

                                                                      Filling

Equipment

Depreciation $49,000   0.5         $24,500    0.3   $14,700  0.2    $9,800

Supervisory

Expense         $3,000     0.1           $300         0.4      $1,200  0.5   $1,500

Total               $52,000                  $24,800               $15,900       $11,300

Cost per Activity pool unit

Particulars                           Machining             Order Filling      Allocated Cost a                   $24,800               $15,900      

Activity b                                  20,000 hours      2,000 order Fillings    Cost per Activity pool unit    1.24                         7.95

c = a ÷ b                         per machine Hour   per order fillings

Here, in reference to Product A8

Machine Hours                     3,000

Cost per Activity pool unit    1.24 per Machine Hour

Total Cost                              3,720

To reach total cost we simply multiply the machine hours with cost per activity pool unit

Order Filling                          500      

Cost per Activity pool unit    7.95 per order fillings      

Total Cost                              3,975

To reach total cost we simply multiply the order filling with cost per activity pool unit    

Total Overhead cost assigned to Product A8 = Total cost of machine hours + Total cost of order filling

= $3,720 + $3,975

= $7,695

the answer is "b.the increased supply will create a surplus. "

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