E4-12 Assigning Costs Using Traditional System, ABC System [LO 4-1, 4-3, 4-4, 4-
ID: 2421733 • Letter: E
Question
E4-12 Assigning Costs Using Traditional System, ABC System [LO 4-1, 4-3, 4-4, 4-5, 4-6] Bunker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow:
Total estimated overhead costs are $150,000, of which $110,000 is assigned to the materials handling cost pool and $40,000 is assigned to the setup cost pool.
Calculate the overhead assigned to the fabric case using the traditional costing system based on direct labor hours. (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)
Calculate the overhead assigned to the fabric case using ABC. (Round activity rates or activity proportions to four decimal placesand round your final answer to 2 decimal place.)
Overhead Assigned ?
Fabric Case Leather Case Number of labor hours 15,000 9,000 Number of material moves 440 660 Number of setups 40 80Explanation / Answer
1. Calculate the overhead assigned to the fabric case using the traditional costing system based on direct labor hours.
Overhead rate = Total overhead costs / Total direct labor hours
= $150,000 / (15,000 + 9,000)
= $6.25 per hour
Number of direct labor-hours used by fabric case = 15,000
Overhead assigned to the fabric case = $6.25 × 15,000 = $93,750
2. Calculate the overhead assigned to the fabric case using ABC.
Overhead assigned to the fabric case = [ $110000 × 440 / (440 + 660) ] + [ $40,000 × 40/ (40+80) ]
= $44,000 + $13,333.33
= $57,333.33
3. The fabric case was overcosted by traditional costing system.
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