Question

EcoFabrics has budgeted overhead costs of $1,152,900. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 549,000 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 $439,200 and $713,700 is allocated to the design cost pool. Additional information related to these pools is as follows. Wool Cotton Total Machine hours 122,000 122,000 244,000 Number of setups 1,220 610 1,830

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 $ $

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

a	Activity cost pools	Activity Rate
	Cutting costs($439,200/244,000 hours)	$1.80	per MH
	Setting up($713,700/1,830 setups)	$390.00	per setups
b		Wool product line	Cotton product line
	Cutting costs(Machine hours*$1.80)	$2,19,600	$2,19,600
	Setting up(No. of setups*$390)	$4,75,800	$2,37,900
	Total overhead cost allocated to products	$6,95,400	$4,57,500
c	Overhead rate using the traditional approach =$1,152,900 / 549,000 hours =$2.10 per direct labor hours
d		Wool product line	Cotton product line
	Direct labor hours alloacted(a)	$2,74,500	$2,74,500
	Overhead rate(b)	$2.10	$2.10
	Overhead allocated(a*b)	$5,76,450.00	$5,76,450.00