Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information:

Activity Cost Driver Amount M XY
Production setups Number of setups $72,000 12 28
Material handling Number of parts 50,000 54 36
Packaging costs Number of units 355,000 108,000 72,000
$477,000

What is the total overhead allocated to Product XY using the current system?

(A) $212,400.
(B) $190,800.
(C) $264,600.
(D) $286,200.

The correct answer is B.

Explanation:

Giving the following information:

Overhead costs are currently allocated using the number of units produced as the allocation base.

Estimated total overhead costs= $477,000

Total Number of units= 108,000 + 72,000= 180,000

Units XY= 72,000 units

First, we need to calculate the estimated overhead rate.

To calculate the estimated manufacturing overhead rate we need to use the following formula:

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Estimated manufacturing overhead rate= 477,000/180,000= $2.65 per unit

Now, we can allocate overhead to product XY:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Allocated MOH= 2.65*72,000= $190,800

explanation:

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