Product # of setups # of components # of direct labor hours Standard 3 30 650 De

Question

Product

#
  of setups

#
  of components

#
  of direct labor hours

Standard

3

30

650

Deluxe

7

50

150

Overhead Costs                                          $20,000                 $60,000

 

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours.







a. What is the total amount of overhead costs assigned to the standard model?







b. Wha is the total amount of overhead costs assigned to the deluxe model?















Assume an activity-based costing system is used and that the nmber of setups and the number of components are identified as the activity-cost drivers for the overhead.















c. What is the total amount of overhead costs assigned to the standard model?







d. What is the total amount of overhead costs assigned to the deluxe model?







e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a btter estimate of costs? Why?















Thanks

 

Product

 
 

#
  of setups

 
 

#
  of components

 
 

#
  of direct labor hours

 
 

Standard

 
 

3

 
 

30

 
 

650

 
 

Deluxe

 
 

7

 
 

50

 
 

150

 

Explanation / Answer

Total overheads $80,000 Overheads apportioned based on direct labor hours Direct labor hours for standard 650 hours Direct labor hours for Deluxe 150 hours a. Overhead cost assigned to standard model based on direct labor hours           80000*650/800 $65,000 b. Overhead cost assigned to Deluxe model based on direct labort hours     80000*150/800 $15,000 c&d Standard Deluxe Number of set ups 3 7 overhead cost        $24,000 $56,000 Standard   80000*3/10   =$24000 Deluxe       80000*7/10   =$56000 No of components 30 50 standard    80000*30/80=30000 $30,000 $50,000 Deluxe       80000*5/80 =50000 e.ABC is more accurate than traditional costing system. One would use ABC method when overhead is high, products are diverse, cost of errors high and competition is stiff. Traditional costing system is unable to calculate the true cost of the product. Traditional costing arbitrarily allocates overhead to the cost of objects.Total company's overhed is allocated to the products based on volume measure.

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