Allocating costs with different cost drivers
Dingle Publishing identified the following overhead activities, their respective costs, and their cost drivers to produce the three types of textbooks the company publishes.
Type of Textbook
Machine maintenance ($240,000)
Number of machine hours
Number of setups
Number of cartons
Photo development ($336,000)
Number of pictures
Deluxe textbooks are made with the finest-quality paper, six-color printing, and many photographs.
Moderate texts are made with three colors and a few photographs spread throughout each chapter. Economy books are printed in black and white and include pictures only in chapter openings.
a. Dingle currently allocates all overhead costs based on machine hours. The company produced the following number of books during the prior year.
Determine the overhead cost per book for each book type.
b. Determine the overhead cost per book, assuming that the volume-based allocation system described in Requirement a is replaced with an activity-based costing system.
c. Explain why the per unit overhead costs determined in Requirements a and b differ.