Exercise 4-3 Wool Cotton Total Warning Don\'t show me this message again for the
ID: 3010486 • Letter: E
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Exercise 4-3
Wool
Cotton
Total
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Wool product line
Cotton product line
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Wool product line
Cotton product line
Exercise 4-3
EcoFabrics has budgeted overhead costs of $1,152,900. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 549,000 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 $439,200 and $713,700 is allocated to the design cost pool. Additional information related to these pools is as follows.Wool
Cotton
Total
Machine hours 122,000 122,000 244,000 Number of setups 1,220 610 1,830Warning
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Explanation / Answer
1. Activity Based Costing Activity rate
Cutting = $439,200 /244,000 = $1.80 per machine hour
Design = $713,700 /1,830 = $390 per setup hour
2. Activity Based Costing
Wool Product Line = (122,000x 1.80) + (1,220x 390) = $695400
Cotton Product Line = (122,000 x 1.80) + (610x 390) = $457500
3. Traditional Approach: Pre-Determined Overhead Rate = $1,152,900/ 549,000 = $2.1 per hour
4. Traditional Costing
Wool Product Line = 549,000 x 0.5 x 2.1 = $576450
Cotton Product Line = 549,000 x 0.5 x 2.1 = $576450
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