Question

Schell Company manufactures automobile floor mats. It currently has two product lines, the Standard and the Deluxe.

Schell has a total of $26,440 in overhead. It currently uses a traditional cost system with overhead applied to the product on the basis of either labor hours or machine hours. Schell has compiled the following information about possible cost drivers and its two product lines:

Schell Company Total	Quantity/Amount Consumed by Standard Floor Mat Line			Quantity/Amount Consumed by Deluxe Floor Mat Line
1,050 labor hours		670 labor hours		380 labor hours
7,120 machine hours		2,910 machine hours		4,210 machine hours

Required:
1. Suppose Schell uses a traditional costing system with direct labor hours as the cost driver. Determine the amount of overhead assigned to each product line.
2. Suppose Schell uses a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line.

Required information

Bunker makes two types of briefcase, fabric and leather. The company is currently using a traditional costing system with labor hours as the cost driver but is considering switching to an activity-based costing system. In preparation for the possible switch, Bunker has identified two activity cost pools: materials handling and setup. Pertinent data follow:

	Fabric Case		Leather Case
Number of labor hours	14,000		9,000
Number of material moves	540		810
Number of setups	48		72

Total estimated overhead costs are $203,550, of which $168,750 is assigned to the materials handling cost pool and $34,800 is assigned to the setup cost pool.

Required:
1. Calculate the overhead assigned to the fabric case using the traditional costing system based on direct labor hours.
2. Calculate the overhead assigned to the fabric case using ABC.
3. Was the fabric case over- or undercosted by the traditional cost system compared to ABC?

Answer 1

1a) Overhead assigned to under direct labor hour

	Standard Floor Mat Line	Deluxe Floor Mat Line
Overhead assigned	26440/1050*670 = 16871	9569

1b) Overhead assigned to under machine hour

	Standard Floor Mat Line	Deluxe Floor Mat Line
Overhead assigned	26440/7120*2910 = 10806	15634

2a) Overhead assigned to Fabric under traditional costing = 203550/23000*14000 = 123900

2b) Overhead assigned to Fabric under ABC = (540*125+290*48) = 81420

2c) Over costed under Traditional costing by 42480