Question

EcoFabrics has budgeted overhead costs of $1,039,500. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 495,000 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 $396,000 and $643,500 is allocated to the design cost pool. Additional information related to these pools is as follows. Machine hours Number of setups Wool 110,000 1,100 Cotton 110,000 550 Total 220,000 1,650 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 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 Calculate the overhead rate using traditional approach. (Round answer to 2 decimal places, e.g. 12.25.) Overhead rates using the traditional approach. per direct labor hour 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

Part 1 –

Cost Pool	Total Overhead Costs (A)	Activity/Cost Driver (Total) (B)	Activity Rate (A / B)
Cutting	$396,000	220,000 Machine Hours	$1.80	Per machine hour
Design	$643,500	1650 Setups	$390.00	per setup
Total	$1,039,500

Overhead Rate for activity based costing

Cutting $1.80 per machine hour

Design $390 per setup

Part 2 –

					Wool Product Line	Cotton Product Line
Cost Pool	Total Overhead Costs	Activity/Cost Driver (Total)	Activity Rate (C )	Activity Driver incurred (G)	Overhead Assigned (G*C)	Activity Driver incurred (O)	Overhead Assigned (O*C)
Cutting	$396,000	220,000 Machine Hours	$1.80	Per machine hour	110000	$198,000	110000	$198,000
Design	$643,500	1650 Setups	$390.00	per setup	1100	$429,000	550	$214,500
Total	$1,039,500					$627,000		$412,500

Overhead Allocated

Wool Product Line = $627,000

Cotton Product Line = $412,500

Part 3 –

Overhead Rate using tradition approach = Total Overheads $1,039,500 / Total Direct labor hours 495,000

= $2.10 per direct labor hour

Part 4 –

It is given that direct labor hours are incurred evenly. It means 247,500 hours incurred in both product line.

Overhead allocated

Wool Product Line = 247,500 Hours x Overhead Rate $2.10 = $519,750

Cotton Product Line = 247,500 Hours x Overhead Rate $2.10 = $519,750

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you