Markham Company Makes Two Products: Basic Product and Deluxe Product

question 8

Multiple Choice

Markham Company makes two products: Basic Product and Deluxe Product. Annual production and sales are 1,700 units of Basic Product and 1,100 units of Deluxe Product. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product requires 0.3 direct labor hours per unit and Deluxe Product requires 0.6 direct labor hours per unit. The total estimated overhead for next period is $98,785.
The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows:
$$\begin{array} { l c c c c } & \text { Estimated } & { \text { Expected Activity } } \\ & & \text { Basic } & & \\\text { Activity Cost Pool } & \text { Overhead Costs } & \text { Product } & \text { Deluxe Product } & \text { Total } \\\text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\text { Activity 2 } & 17,385 & 1,700 & 200 & 1,900 \\\text { General Factory } & 50,872 & 510 & 660 & 1,170 \\\text { Total } & \$ 98,785 & & &\end{array}$$
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(Note: The General Factory costs are allocated on the basis of direct labor hours.)
The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to:

• A) $9.15.
• B) $51.99.
• C) $86.93.
• D) $10.23.

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Definitions:

Withdrawals

Amounts taken from a business by the owner for personal use.

Assets

Resources owned by a business or individual with economic value or expected to provide future benefits.

Salaries and Wages

Compensation paid to employees for their services, including both regular salary and hourly wages.

Expenses

The outflows or consumption of assets or incurring/liabilities (creating a liability) from a company's operations aimed at generating revenue.