Question

ULL FULL SON PRINTER VERSION BACK NEXT Exercise 17-03 a1-a2, b1-b2 Eco Fabrics has budgeted overhead costs of $1,134,000. It has allocated overhead on a plantwide basis tots two products (wool and cotton) using direct labor hours which are estimated to be 540,000 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 $432.000 and 5702,000 is allocated to the design cost pool. Additional information related to these pools is as follows Machine hours Number of setups Wool 120,000 1,200 Cotton 120,000 600 Total 240,000 1,800 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 TEX 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

Answer 1

Answer :-

Calculation of overhead rate using activity based costing are as follows :-

​​​​​Overhead rate of Cutting = Overhead allocated to cutting cost /Total Machine hours

Given , Overhead allocated to cutting cost = $432,000

Total Machine hours = 240,000 hours

Overhead rate of Cutting = $ 432,000 / 240,000 hours

Overhead rate of Cutting = $1.8 per machine hours

Overhead rate of Design = Overhead allocated to design cost /Total No.of setup

Overhead allocated to design cost = $702,000

Total No.of setup = 1800

Overhead rate of Design = $ 702,000 / 1,800

Overhead rate of Design = $ 390 per setup

.

The amount of overhead allocated to the Wool and Cotton product line using Activity based costing are as follows :-

Overhead allocated to Wool product line = (Overhead rate of Cutting × Machine hours of Wool) + ( Overhead rate of Design × No.of setup of Wool)

Overhead rate of Cutting = $ 1.8 per machine hours

Machine hours of Wool = 120,000

Overhead rate of Design = $390 per setup

No.of setup of Wool = 1,200

Overhead allocated to Wool product line = ($1.8 × 120,000) + ( $390 × 1200)

Overhead allocated to Wool product line=$216,000 + $468,000

Overhead allocated to Wool product line = $684,000

Overhead allocated to Cotton product line = (Overhead rate of Cutting × Machine hours of Cotton) + ( Overhead rate of Design × No.of setup of Cotton)

Overhead rate of Cutting = $ 1.8 per machine hours

Machine hours of Cotton = 120,000

Overhead rate of Design = $390 per setup

No.of setup of Cotton = 600

Overhead allocated to Cotton product line = ($1.8 × 120,000) + ( $390 × 600)

Overhead allocated to Cotton product line=$216,000 + $234,000

Overhead allocated to Cotton product line = $450,000

.

The overhead rate using traditional approach -

Overhead rate = Total overhead costs / Direct labor hours

Total overhead costs = Overhead allocated to Wool product line + Overhead allocated to Cotton product line

Total overhead costs = $684,000 + $450,000

Total overhead costs = $1,134,000

Direct labor hours = 540,000 hours

Overhead rate = $1,134,000/ 540,000

Overhead rate = $2.1 per direct labor hours

.

Overhead allocated to the Wool and cotton product line using the traditional approach , assuming direct labor hours were incurred evenly between the wool and cotton are as follows :-

Total Direct labor hours = 540,000 hours

We will divided the total direct labor hours by 2 as given that direct labors hours were incurred evenly between the wool and cotton.

Each product Direct labor hours = 540,000/2 = 270,000 hours

Overhead allocated to Wool product line = Overhead rate using traditional approach × Each product Direct labor hours

Overhead allocated to Wool product line = $2.1 × 270,000 hours

Overhead allocated to Wool product line = $567,000

Overhead allocated to Cotton product line = Overhead rate using traditional approach × Each product Direct labor hours

Overhead allocated to Cotton product line = $2.1 × 270,000 hours

Overhead allocated to Cotton product line = $567,000

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