Reference no: EM132806776
Ace Company manufactures a variety of both high-and low- volume products. The following information is for the company's most recent year of operation:
Direct Material cost.............................................................................P1,000,000
Direct Labor cost................................................................................. 2,000,000
Overhead Cost:
Machine-related:
Machine operation............................................................... 500,000
Machine setuo.................................................................... 200,000
Materials related:
Material Handling............................................................. 310,000
Materials Administration................................................ 500,000
Freight in............................................................................ 150,000
Other Overhead............................................................................ 2,500,000
Machine Hours.....................................................40,000
Pounds of Materials..........................................200,000
Setups..................................................................... 500
Purchase Orders...................................................10,000
Ace Company's existing costing system allocates all machine-related overhead based on machine hours, all materials-related overhead based on direct material cost, and all remaining overhead based on direct labor cost. However, a recent study determined that machine setup costs and material handling costs are primarily related to the number of setups performed; materials administration cost is primarily related to the number of purchase orders issued, and freight-in is primarily related to pounds of materials. Ace Company does not keep significant materials inventories on hand.
Required:
Problem (a) Calculate the three overhead rates in Ace Company's existing costing system for the most recent year.
Problem (b) Create an ABC system for Ace Company, making only the changes suggested by the results of the recent study. Give your answer in the form of a list of cost pools. Beside the name of each pool, list the driver to be used to allocate that cost pool to products.
Problem (c) Calculate the overhead rates that the ABC system should use for the most recent year.