Addy company has 2 products: A and B. The annual production and sales of Product A is 1700 units, and the annual production and sales of Product B is 1100 units. The company has traditionally used Direct Labor Hours to apply all manufacturing overhead to products. Product A requires 0.3 Direct Labor Hours per unit. Product B requires 0.6 Direct Labor Hours per unit. Total estimated overhead for the period is $98,785The company is considering switching to an Activity Based Costing system. The new ABC system would have 3 overhead cost pools, with overhead costs and activity as follows: Estimated Overhead Expected ActivityActivities Cost Product A Product B Product CActivity 1 $30,528 1000 MH 600 MH 1600 MHActivity 2 $17,385 1700 Setups 200 Setups 1900 SetupsTotal $50,872 510 DLH 660 DLH 1170 DLHThe pre-determined overhead rate under the traditional costing system is closest to:a. $9.15.b. $43.48.c. $84.43.d. $19.08.

Addy

Predetermined overhead rate

c. $84.43

Explanation:

a) Data and Calculations:

Product A requires 0.3 Direct Labor Hours per unit.

Product B requires 0.6 Direct Labor Hours per unit.

Total estimated overhead for the period is $98,785

Direct Labor Hours for A = 510

Direct Labor Hours for B = 660

Total Direct Labor Hours = 1,170

b) Addy's two products will have a predetermined overhead rate that is equal to $98,785/1,170, which is $84.43.  The predetermined overhead rate results from the division of the total estimated overhead for the period by the total number of direct labor hours for products A and B.  Addy applies this rate to each product based on the level of direct labor hours used in order to ascertain the amount of overhead attributable to the product.

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