Thomsen Computer Company produces three products: Earth, Wind, and Fire. Earth requires 80 machine setups, Wind requires 60 setups, and Fire requires 180 setups. Thomsen has identified an activity cost pool with allocated overhead of $360000 for which the cost driver is machine setups. How much overhead is assigned to each product?

Earth = $90,000

Wind = $67,500

Fire = $202,500

Explanation:

Activity based costing is a costing system that assigns the cost of identified activities , mostly overhead and indirect cost to all products and services produced according to the respective volume of the activities consumed by each of the products and services , using cost drivers.

Workings.

The cost driver in the scenario is Machine set up

Earth = 80 set up

Wind = 60 set up

Fire = 180 set up

Total = 320 set up

General Overhead = 360,000

Earth = 80/320 *360,000 = 90,000

Wind = 60/320*360,000 = 67,500

Fire = 180/320*260000 = 202,500

income statement is prepared in order to show the profits and loss of a business. in order to prepare the income statement she should collect all the income and expenses of the product with the cost of production.