The Controller for Precise Manufacturing Has Established the Following Overhead

Essay

The controller for Precise Manufacturing has established the following overhead cost pools and cost drivers:
$\begin{array}{lll}&\text { Budgeted }\\\underline{\text { Overhead Cost Pool }} & \underline{\text { Overhead Cost }} & \underline{\text { Cost Driver }} \\ \text { Machine setups } & \$ 300,000 & \text { Number of setups } \\\text { Material handling } & 80,000 & \text { Units of raw material } \\\text { Quality control } & 90,000 & \text { Number of }\\\text { inspection } && \text { inspections } \\\text { Other overhead costs } & \underline{150,000}& \text { Machine hours } \\\text { Total } &\underline{\$ 620,000} \\\end{array}$


$\begin{array}{lll}&\text { Budgeted Level }\\\underline {\text { Overhead Cost Pool } }& \underline {\text { for Cost Driver }} & \underline {\text { Pool Rate } }\\\text { Machine setups } & 300 \text { setups } & \$ 1,400 \text { per setup } \\\text { Material handling } & 40,000 \text { units } & \$ 2.00 \text { per unit } \\\text { Quality control } & 800 \text { inspections } & \$ 60 \text { per inspection } \\\text { Other overhead } & 25,000 \text { machine } & \$ 10 \text { per machine hour }\\&\text { hours }\\\end{array}$


$\text { Order No. } 905 \text { has the following production requirements. }$

$\text { Machine setups: 10 }$
$\text { Raw material: 13,400 units }$
$\text { Inspections: 20 }$
$\text { Machine hours: 900 }$ Required:
A. Compute the total overhead that should be assigned to Order No. 905 by using activity-based costing.
B. Suppose that Precise were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to Order No. 905.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.