EcoFabrics has budgeted overhead costs of $1,162,350. It has allocated overhead
ID: 2473009 • Letter: E
Question
EcoFabrics has budgeted overhead costs of $1,162,350. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 553,500 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 $442,800 and $719,550 is allocated to the design cost pool. Additional information related to these pools is as follows.
Wool
Cotton
Total
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.
Wool product line
Cotton product line
$
Calculate the overhead rate using traditional approach. (Round answer to 2 decimal places, e.g. 12.25.)
Wool product line
Cotton product line
$
Wool
Cotton
Total
Machine hours 123,000 123,000 246,000 Number of setups 1,230 615 1,845Explanation / Answer
Overhead rates for activity based costing
Cutting Department; Overhead allocated/Cost Driver
= 442800/246000
=$1.80 per Machine Hour
Design Department= Overhead allocated/Cost Driver
=719550/1845
=390 Per Set ups
Overhead allocated:
Cost Allocated= (Number of Machine Hours*Cost Per Machine Hour)+(Number of Set ups*Per Set up cost)
Wool Product Line =(123000*$1.8)+(1230*390)
=$221400+$479700
=$701100
Cotton Product Line= 123000*$1.8+615*$390
=$221400+$239850
=$461250
Overhead Rate using Traditional Rate
Overhead Rate= Total Overhead/Total Labour Hours
=$1162350/553500
=$2.1
If the Labour Hours are divided equally between the Wool product Line and Cotton Product Line then the Cost will be as follows
=$276750*2.1=$581175.
$581175 will be the cost of Wool as well as Cotton Product Line
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