Calculate the overhead rate using activity based costing. (Round answers to 2 de

Question

Calculate the overhead rate using activity based costing. (Round answers to 2 decimal places, e.g. 12.25.)

Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.

Calculate the overhead rate using traditional approach. (Round answer to 2 decimal places, e.g. 12.25.)

What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?

Wool

Cotton

Total

EcoFabrics has budgeted overhead costs of $1,048,950. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 499,500 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are cutting (cost driver is machine hours) and design (cost driver is number of setups). Overhead allocated to the cutting cost pool is $399,600 and $649,350 is allocated to the design cost pool. Additional information related to these pools is as follows.

Wool

Cotton

Total

Machine hours 111,000 111,000 222,000 Number of setups 1,110 555 1,665

Explanation / Answer

REQUIREMENT 1. - THE OVERHEAD RATE USING ACTIVITY BASED COSTING.

OVERHEAD RATE = OVERHEAD ALLOACATED TO ACTIVITY / NO OF COST DRIVER

OVERHEAD RATE FOR “CUTTING ACTIVITY”
= OVERHEAD ALLOCATED TO CUTTING / TOTAL MACHINE HOURS
= 399600 / 222000
= 1.80 $ PER MACHINE HOUR

OVERHEAD RATE FOR “DESIGNING ACTIVITY”
= OVERHEAD ALLOCATED TO DESIGNING / TOTAL NUMBER OF SETUPS
= 649350 / 1665
= 390 $ PER SETUP

REQUIREMENT 2. - THE AMOUNT OF OVERHEAD ALLOCATED TO THE WOOL PRODUCT LINE AND THE COTTON PRODUCT LINE

OVERHEAD ALLOCATED TO WOOL PRODUCT LINE

FOR CUTTING ACITIVITY
= NUMBER OF MACHINE HOUR USED X MACHINE HOUR RATE FOR CUTTING
= 111000 X 1.80 $
= 199800 $

FOR DESIGNING ACITIVITY
= NUMBER OF SETUPS USED X PER SETUP RATE FOR DESIGNING
= 1110 X 390 $
= 432900 $

TOTAL OVERHEAD FOR WOOL PRODUCT LINE
= O.H. FOR CUTTING ACTIVITY + O.H. FOR DESIGNING ACTIVITY
= 199800 + 432900
= 632700 $

OVERHEAD ALLOCATED TO COTTON PRODUCT LINE

FOR CUTTING ACITIVITY
= NUMBER OF MACHINE HOUR USED X MACHINE HOUR RATE FOR CUTTING
= 111000 X 1.80 $
= 199800 $

FOR DESIGNING ACITIVITY
= NUMBER OF SETUPS USED X PER SETUP RATE FOR DESIGNING
= 555 X 390 $
= 216450 $

TOTAL OVERHEAD FOR COTTON PRODUCT LINE
= O.H. FOR CUTTING ACTIVITY + O.H. FOR DESIGNING ACTIVITY
= 199800 + 216450
= 416250 $

REQUIREMENT – 3 - OVERHEAD RATE USING TRADITIONAL APPROACH

OVERHEAD RATE
= TOTAL OVERHEAD / NO OF LABOUR HOUR
= 1048950 / 499500
= 2.10 $ PER LABOUR HOUR

REQUIREMENT – 4 - ALLOCATION OF OVERHEAD USING TRADITIONAL APPROACH

NO OF LABOUR HOUR USED IN EACH DEPARTMENT
= 499500 / 2
= 249750 LABOUR HOURS

OVERHEAD FOR WOOL PRODUCT LINE
= NO OF LABOUR HOUR X O.H. RATE PER LABOUR HOUR
= 249750 X 2.10
= 524475 $

OVERHEAD FOR DESIGN PRODUCT LINE
= NO OF LABOUR HOUR X O.H. RATE PER LABOUR HOUR
= 249750 X 2.10
= 524475 $

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