E4-3 EcoFabrics has budgeted overhead costs of $945,000. It has allocated overhe
ID: 2343329 • Letter: E
Question
E4-3 EcoFabrics has budgeted overhead costs of $945,000. It has allocated overhead on a Assign or plantwide basis to its two products (wool and cotton) using direct labor hours which are tradition estimated to be 450,000 for the current year. The company has decided to experiment with (LO 1, 2), activity-based costing and has created two activity cost pools and related activity cost driv- ers. 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 $360,000, and $585,000 is allocated to the design cost pool. Additional information related to these pools is as follows Wool Cotton 100,000 100,000 500 Total Machine hours Number of setups 200,000 1,000 1,500 Instructions (a) Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing (b) 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? How does this compare with the amount allocated using ABC in part (a)?Explanation / Answer
a Overhead rates for activity-based costing: Cutting 1.8 per machine hour =360000/200000 Design 390 per setup =585000/1500 Wool product line Cotton product line Activity-based costing Cutting: 100,000 × $1.80 180000 100,000 × $1.80 180000 Design: 1,000 × $390 390000 500 × $390 195000 Total cost allocated 570000 375000 b Overhead rate using the traditional approach 2.1 per direct labor hour =945000/450000 Wool product line Cotton product line Traditional costing 225,000 × $2.10 472500 225,000 × $2.10 472500 Total cost allocated 472500 472500 Comparison: Wool product line Cotton product line Activity-based costing 570000 375000 Traditional costing 472500 472500 Difference 97500 97500 Higher using ABC Lower using ABC
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