Cost Behavior and Activity-Based Costing

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Medina Corporation (100 points):

Complete the following questions using Microsoft Excel. No other submission format is allowed. Review the grading rubric to confirm you are meeting the assignment requirements.

Medina Corporation manufactures cruising bicycles and mountain bicycles. Estimated direct labor time to produce each type of bicycle is as follows:

Cruising Mountain
Estimated bicycles produced 30,000 20,000
Direct labor hours per bicycle 1 3

Estimated overhead for the two product lines = SAR 900,000

a. Compute the overhead cost assigned to each type of bicycle assuming direct labor hours is used to allocate overhead costs.
b. The controller is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the Mountain bicycle product line because of its complexity. He therefore developed the following three activity cost pools and related cost drivers to better understand these costs.

Activity Cost Pools Expected Use of Cost Drivers Estimated Overhead Costs
Setting up machines 1,000 setups SAR 150,000
Assembling 90,000 labor hours SAR 630,000
Inspection 1,200 inspections SAR 120,000

Compute the activity-based overhead rates for these three cost pools.

c. Compute the cost that is assigned to each bicycle product line using activity-based costing system, given the following information.

Expected Use of Cost Drivers per Product

Cruising Mountain
Number of setups 150 850
Direct labor hours 30,000 60,000
Number of inspections 100 1,100

d. What do you believe the controller should do and why?
e. You must show all your work.

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