Question

Plaid Manufacturing Co. produces two products: G1 and M1. The company uses an activity based costing system. The following are the activities, budgeted total cost and cost drivers per activity for the year 20x9:

Activity	Budgeted Cost	Cost Base	Cost Base Volume
Assembly	$877831	# of DL hours	37167
Inspection	$668988	# of units	20830
Shipping	$339555	# of batches	186

Plaid Manufacturing has budgeted to produce 3,000 units of M1. M1 is manufactured in batches of 80 units and requires 19501 hours of direct labour.

What is the difference between overhead allocated to product M1 if Plaid Co. used traditional costing versus activity based costing? Assume overhead is allocated based on direct labour hours under the traditional costing system.

Select one:

a. $164808

b. $989754

c. $364360

d. $380554

Answer 1

Correct answer----(C) $3,64,360

Overheads allocation using ABC Costing

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost	Expected Activity (B)	Activity rate (A/B)
Assembly	Number of DL hours	$ 8,77,831.00	37,167	$            23.62	Per DL hours
Inspection	Number of Units	$ 6,68,988.00	20830	$            32.12	Per Units
Shipping	Number of Batches	$ 3,39,555.00	186	$      1,825.56	Per Batches

Cost assigned to Product Y
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Assembly	$               23.62	19501	$       4,60,585.53
Inspection	$               32.12	3000	$           96,349.69
Shipping (3000/80)	$         1,825.56	38	$           68,458.67
Total Overheads assigned			$       6,25,393.89

Overheads assigned using traditional costing system and diffrence

Plantwide overhead rate ((877831+668988+339555)/37167)	$                 50.75
Overhead allocated to Y(50.75 x 19501)	$           9,89,754
Overhead allocated using ABC Costing	$           6,25,394
Diffrence	$           3,64,360