Question

EcoFabrics has budgeted overhead costs of $1,039,500. It has allocated overhead on a plantwide basis 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. Total Machine hours Number of setups Wool 110,000 1.100 Cotton 110,000 550 220,000 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

Answer 1

Overhead rate using the activity based costing

Cutting = Overhead / Total Machine hours

= $396,000 / 220,000

= $1.80 per machine hour

Design = Overhead / Number of setups

= $643,500 / 1,650

= $390 per setup

Overhead allocated to the wool product line and the cotton product line

Wool product line = (110,000 * $1.80) + (1,100 * $390)

= $198,000 + $429,000

= $627,000

Cotton Product line = (110,000 * $1.80) + (550 * $390)

= $198,000 + $214,500

= $412,500

Overhead rate using traditional approach

Overhead rate = Total Overhead / Direct labor hours

= $1,039,500 / 495,000

= $2.10

Overhead allocated using the traditional method

Wool Product line = $1,039,500 / 2

= $519,750

Cotton Product line = $1,039,500 / 2

= $519,750