Question

OBJEC Exercise 5-39 Comparing ABC and Plantwide Overhead Cost Assignments Wellington Chocolate Company uses activity-based costing (ABC). The controller identified two activities and their budgeted costs: Setting up equipment $ 432,000 Other overhead 1,440,000 Setting up equipment is based on setup hours, and other overhead is based on oven hours. (Continued)

Answer 1

1. ACTIVITY RATE

	rate
SETTING UP EQUIPMENT	54$[432000/8000hours]
other overhead	150$[1440000/9600]

2. allocation to fudge

	fudge
setting up equipment	345600[54$*6400]
other overhead	240000$[150$*1600]
Total cost	585600

3.unit overhead cost of fudge

=unit overhead

=585600/8000units produced

=73.20$

4.plantwide overhead rate = total cost/oven hours

=(432000+1440000)/(1600+8000)

=1872000/9600

=195$ per oven hour

5.plantwide overhead rate fudge

=195$*1600oven hours

=312000$

6.ABC system uses separate cost driver for individual activites to determine cost per activity

cost is allocated to product based on individual activity

whereas single plantwide rate uses only single activity as a base of allocation

fudge consumes lesser oven hours so cost allocated using oveh hours as a base (plantwide) is lesser than ABC cost as it consumes more set up hours.