Tri-bikes manufactures two different levels of bicycles: the Standard and the Extreme. The total overhead of $300,000 has traditionally been allocated by direct labor hours, with 150,000 hours for the Standard and 50,000 hours for the Extreme. After analyzing and assigning costs to two cost pools, it was determined that machine hours is estimated to have $200,000 of overhead,with 4,000 hours used on the Standard product and 1,000 hours used on the Extreme product. It was also estimated that the setup cost pool would have $100,000 of overhead, with 1,000 hours for the Standard and 1,500 hours for the Extreme. What is the overhead rate per product, under traditional and under ABC costing?

Manufacturing is the method of creating products by hand or machine, which the company then sells to a customer. Raw materials or little pieces of a specific good may be the items used in manufacturing. On such a large manufacturing line with specialized staff and equipment, manufacturing often takes place.

Briefing:

Manufacturing overhead cost estimated at 300,000/200,000 = $1.5 per hour for direct labor

You can now assign overhead to every product:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation baseStandard= 1.5*150,000= $225,000

Extreme= 1.5*50,000= $75,000

Machine:

Overhead= $200,000

hours equals 1,000 hours for the Extreme product and 4,000 hours for the Standard product.

Manufacturing overhead rate is estimated at 200,000/5,000, or $40 per hour.

Set up:

Overhead= $100,000

Again for Standard and Extreme, an hour is equal to 1,000 hours.

Estimated manufacturing overhead rate= 100,000/2,500= $40.

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