PRACTICE EXERCISE: Assign overhead using traditional costing and ABC. a plantic

Question

PRACTICE EXERCISE: Assign overhead using traditional costing and ABC. a plantic abrics has budgeted overhead costs of $955,000. It has allocated overhead on sis to its two products (wool and cotton) using direct labor hours which are ed to be 477,500 for the current vear. The company has decided to experiment estimat ctivity-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 dri ver is number of setups). Overhead allocated to the Cutting cost pool is $400,000, and $555,000 is allocated to the Design cost pool. Additional information related to these pools is as follows. Wool Cotton Total Machine hours 100,000 100,000 200,000 Number of setups 1,000 500 1,500 Instructions Determine the amount of overhead allocated to the wool product line and the cottor product line using activity-based costing. What is the difference between the allocation of overhead to the wool and cotton product lines using activity-based costing versus the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?

Explanation / Answer

Req a: STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Cutting MH 400,000 200,000 2 per MH Design Setups 555,000 1,500 370 Per setup Activity Rate WOOL COTTON Activity OH Allocated Activity OH Allocated Cutting 2 per MH 100000 200,000 100000 200,000 Design 370 Per setup 1000 370,000 500 185000 Total OH allocated 570,000 385,000 Req b: Tradition OH rate: Estimated Overheads / Direct labour hours = $ 955,000 /477,500 = $ 2 per DLH Overheads Rate WOOL COTTON Activity OH Allocated Activity OH Allocated Total OH $ 2 per DLH 238750 477,500 238750 477,500 Difference in Overheads: Wool Cotton OH allocated as per ABC 570000 385000 OH allocated as per Traditional 477500 477500 Difference in OH 92500 -92500

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