Question

EcoFabrics has budgeted overhead costs of $1,115,100. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 531,000 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 $424,800 and $690,300 is allocated to the design cost pool. Additional information related to these pools is as follows.

		Wool		Cotton		Total
Machine hours		118,000		118,000		236,000
Number of setups		1,180		590		1,770

Calculate the overhead rate using activity based costing. (Round answers to 2 decimal places, e.g. 12.25.) Overhead rates for activity-based costing Cutting per machine hour Design per setup LINK TO TEXT LINK TO TEXT 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 Overhead Allocated t LINK TO TEXT LINK TO TEXT Calculate the overhead rate using traditional approach. (Round answer to 2 decimal places, e.g. 12.25.) Overhead rates using the traditional approach t per direct labor hour LINK TO TEXT LINK TO TEXT What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton? Wool product line Cotton product line Overhead Allocated

Answer 1

→ Overhead Rates overhead rate using activity based costing Expected use of Estimated Overhead Cutting $ 424,800 236000 Machine hours Design $ 690,300 1770 Setups Activity based overhead rate 1.80 Per Machine hour $ 390.00 Per setup Activity cost pool Wool Activity based Expected Cost driver overhead rate 118000 $ 1.80 1180 $ 390.00 Expected Cost driver 118000 $ 590 $ Cost Assigned $ 212,400 $ 460,200 Cotton Activity based overhead rate 1.80 390.00 Cutting Design Cost Assigned $ 212,400 $ 230,100 Total 672600 $ 442,500 Traditional Approach Overhead rate $ 2.10 Per direct labor hour = Estimated Overhead Esimated direct Labor Cost =1115100 531000 -> Overhead allocated = Overhead rate x Direct labor hour Wool = 2.10 x 265500 Cotton = 2.10 x 265500 557,550 557,550 Assuming direct labour hours are incurred evenly for both products = 531000 / 2 = 265500