Reference no: EM1311934

Calculation of overhead rate using traditional, ABC and overhead cost allocation.

Venable Inc. produces golf carts.  One of its plants in South Carolina produces two versions of carts: a basic model and a deluxe model.  The deluxe model has a sturdier frame, a higher horsepower engine, bigger tires, and softer seats.  At the beginning of the year, the following data were prepared by the controller's office for this SC plant:

	Basic Cart	Deluxe Cart
Expected Quantity to Produce	20,000	10,000
Selling Price	$1,800	$3,600
Direct Material and Direct Labor Costs	$800	$1,600
Machine Hours	5,000	5,000
Direct Labor Hours	10,000	10,000
Engineering Support (Hours)	1,500	4,500
Receiving (Orders Processed)	300	500
Material Handling (Number of Moves) 2,000	4,000
Purchasing (Number of Requisitions)	100	200
Maintenance (Hours Used)	1,000	3,000
Paying Suppliers (Invoices Processed)	250	500
Setting up Batches (Number of Setups)	20	60

Additionally, the following overhead activity center costs are reported:

Maintaining Equipment	$1,140,000
Engineering Support	1,200,000
Material Handling	1,200,000
Setting Up Equipment	960,000
Purchasing Materials	600,000
Receiving Goods	400,000
Paying Suppliers	300,000
Providing Facility Space	200,000
Total	$6,000,000

Providing facility-level costs are allocated on basis of machine hours.  This provides a measure of time the facility is used by each product.
1. Calculate the cost per cart using direct labor hours to assign overhead costs.
2. What is the gross margin on a deluxe golf cart?
3.  Using ABC how much engineering overhead costs would be allocated to a basic cart?
4. Using ABC would the amount of purchasing overhead costs allocated to each type of cart be more or less for the deluxe than the basic?  Provide quantitative support for your answer.