Franklin Company produces commercial gardening equipment. Since production is hi

Question

Franklin Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. The costs and cost drivers associated with the four overhead activity cost pools follow:

Production of 900 sets of cutting shears, one of the company’s 20 products, took 180 labor hours and 7 setups and consumed 15 percent of the product-sustaining activities.

Required

A) Had the company used labor hours as a company wide allocation base, how much overhead would it have allocated to the cutting shears?

B) How much overhead is allocated to the cutting shears using activity-based costing?

C) Compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 900 units are produced. If direct product costs are $200 and the product is priced at 30 percent above cost for what price would the product sell under each allocation system?

Activities Unit Level Batch Level Product Level Facility Level Cost $ 66,700 $ 23,970 $ 12,000 $ 288,000 Cost driver 2,900 labor hrs. 47 setups Percentage of use 18,000 units

Explanation / Answer

Solution A:

Total estimated overhead = $66,700 + $23,970 + $12,000 + $288,000 = $390,670

Estimated direct labor hours = 2900 labor hours

Predetermined overhead rate = Estimated overhead / Estimated direct labor hours = $390,670 / 2900 = $134.7138 per labor hours

Overhead allocated to cutting shears = 180 * $134.7138 = $24,248

Solution B:

Solution c:

Overhead cost per unit - using ABC = $23,910 / 900 = $26.57 per unit

Overhead cost per unit - using direct labor hours for allocation = $24,248 / 900 = $26.94

Computation of overhead assigned to product - Activity Based Costing Activity Cost Cost Driver Qty of cost driver Allocation rate Cutting Shears Allocation Qty Allocated Overhead Unit Level $66,700.00 Labor hours 2900 $23.00 180 $4,140.00 Batch level $23,970.00 Setups 47 $510.00 7 $3,570.00 Product level $12,000.00 Percentage of use 100% $12,000.00 15% $1,800.00 Facility level $288,000.00 Nos of units 18000 $16.00 900 $14,400.00 Total $390,670.00 $23,910.00

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