Reference 05-15
Speed Demon Inc Management Is Considering Implementing Activity Based Costing

Reference 05-15
Speed Demon Inc. manufactures two products: speedometers and odometers. During the month, it produced
2,000 speedometers and 3,000 odometers and incurred estimated overhead costs of $45,300. The company currently allocated overhead on the basis of direct labor hours. This month, the company incurred the following: $\begin{array}{|l|l|l|}\hline & \text { Speedometers } & \text { Odometers } \\\hline \text { Machine Hours } & 750 & 1,000 \\\hline \text { Labour Hours } & 1,200 & 800 \\\hline \text { Labor cost } & \$ 12,000 & 18,000 \\\hline\end{array}$

Management is considering implementing activity based costing. An analysis of estimated overhead costs revealed the following activities:

$\begin{array}{|l|l|l|l|l|}\hline \text { Activity } & \text { Total Cost } & \begin{array}{l}\text { Activity } \\\text { Measure }\end{array} & \begin{array}{l}\text { Use of Activity } \\\text { Measure by Product } \\\text { Line }\end{array} \\\hline & & & \text { Speedometers} & \text { Odometers } \\\hline \begin{array}{l}\text { Materials } \\\text { Handling }\end{array} & \$ 18,000 & \begin{array}{l}\text { of } \\\text { requisitions }\end{array} & 400 & 600 \\\hline \begin{array}{l}\text { Machine } \\\text { Set-ups }\end{array} & 12,600 & \# \text { of set-ups } & 150 & 300 \\\hline \begin{array}{l}\text { Quality } \\\text { Inspections }\end{array} & 14,700 & \begin{array}{l}\text { \# of } \\\text { inspections }\end{array} & 200 & 400 \\\hline\hline\end{array}$
-Assuming a current predetermined overhead rate of $10.00, what is the total overhead allocated to speedometers using the current costing system?

A) $45,000
B) $8,000
C) $12,000
D) $20,000

Correct Answer:

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