Nine Company makes three products: Product 1, Product 2, and Product 3. The company
currently uses a traditional cost system and applies overhead based on direct labor hours.
Management estimated 4,000 direct labor hours for the year. An analysis of overhead costs
showed the following.
Activity
Cost driver
Annual cost
Setting up production
Number of production runs
Processing orders
Number of orders
60,000
200 orders
Handling materials
Pounds of materials
24,000
8,000 pounds
Using machines
Machine hours
72,000
10,000 machine hours
Inspecting
Number of inspections
60,000
40 inspections
Packing
Units produced
48,000
20,000 units
Total overhead
$36,000
$300,000
The following results occurred during February.
Direct materials cost
Product 1
Product 2
Product 3
$6,000
$3,750
$3,000
Annual cost driver units
100 runs
Direct labor cost
$3,000
$3,600
$3,300
100
120
110
Number of production runs
2
4
8
Number of orders
8
8
4
Pounds of materials
400
800
200
Machine hours
500
300
300
2
2
2
1,000
500
400
Direct labor hours
Number of inspections
Units produced
1. Calculate the overhead rate for the traditional cost system using direct labor hours to apply
overhead.
2. Determine the total cost of Product 1 in the traditional cost system using direct labor hours to apply
overhead.
3. Determine the total cost of Product 2 in the traditional cost system using direct labor hours to apply
overhead.
4. Determine the total cost of Product 3 in the traditional cost system using direct labor hours to apply
overhead.
5. Assume Nine Company uses activity-based costing. Determine the cost driver rate used to apply
overhead for the “setting up production” activity.
6. Assume Nine Company uses activity-based costing. Determine the cost driver rate used to apply
overhead for the “processing orders” activity.
7. Assume Nine Company uses activity-based costing. Determine the cost driver rate used to apply
overhead for the “handling materials” activity.
8. Assume Nine Company uses activity-based costing. Determine the cost driver rate used to apply
overhead for the “using machines” activity.
9. Assume Nine Company uses activity-based costing. Determine the cost driver rate used to apply
overhead for the “inspecting” activity
10. Assume Nine Company uses activity-based costing. Determine the cost driver rate used to apply
overhead for the “packing” activity
11. Determine the total cost of Product 1 using activity-based costing.
12. Determine the total cost of Product 2 using activity-based costing
13. Determine the total cost of Product 3 using activity-based costing
