Puget World, Incorporated, manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow: Model N 800 XL Model N 500 Activity Cost Pool Machine setups Special processing General factory Direct Labor- Hours per Unit 3.0 1.0 Activity Measure Number of setups Machine-hours Direct labor-hours Annual Production 4,000 units 13,000 units Additional information about the company follows: a. Model N 800 XL requires $70 in direct materials per unit, and Model N 500 requires $30. b. The direct labor wage rate is $17 per hour. c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows: Activity Measure Number of setups Machine-hours Direct labor-hours Model N 800 XL 150 Total Direct Labor-Hours 20,000 12,000 12,000 13,000 25,000 Estimated. Overhead Cost $ 520,000 235,000 1,445,000 $ 2,200,000 Expected Activity Model N 500 250 0 13,000 Total 400 20,000 25,000

Definition Definition Indirect costs incurred while producing goods or services. Overhead costs cannot be directly attributed to products or services. Overhead includes indirect material cost, indirect labor cost, rent, utilities expenses, and depreciation. Since these costs directly affect the profitability of a company, managing overhead becomes an important task for management.