Question

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. Number of labor hours Number of material moves Number of setupe Fabric Case Leather Case 16,000 9.000 820 1,230 91 169 Total estimated overhead costs are $385,500, of which $307,500 is assigned to the materials handling cost pool and $78,000 is assigned to the setup cost pool. E4-12 (Algo) Assigning Costs Using Traditional System, ABC System [LO 4-1, 4-3,4-4, 4-5, 4-6) 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required) Calculate the overhead assigned to the fabric case using the traditional costing system based on direct labor hours. (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Overhead Assigned

Answer 1

Answer 1)

Calculation of Overhead assigned to Fabric Case using traditional costing system

Overhead assigned to Fabric Case = Labor hours worked in Fabric case X Overhead rate

                                                               = 16,000 labor hours X $ 15.42 per labor hour

                                                               = $ 246,720

Therefore, overheads assigned to Fabric Case under traditional costing system are $ 246,720.

Working Note:

Calculation of overhead rate based on traditional costing system

Overhead rate = Total estimated overhead costs/ Total number of labor hours consumed by both products

                                = $ 385,500/ (16,000 labor hours + 9,000 labor hours)

                                = $15.42 per labor hour

Answer 2)

Calculation of overheads assigned to Fabric Case under Activity Based Costing System

Overheads assigned to Fabric case = (Number of material moves of Fabric case X Activity rate based on material handling cost pool) + (Number of setups of fabric case X Activity rate based on Set up cost pool)

                                   = (820 material moves X $ 150 per material move) + (91 setups X $ 300 per setup)

                                   = $ 123,000 + $ 27,300

                                    = $ 150,300

Working Note:

Calculation of Activity rate based on Materials handling cost pool

Activity rate based on materials handling cost pool= Total estimated overhead costs assigned to material handling cost pool/ Total number of material moves of both Products

                                = $ 307,500/ (820 material moves + 1,230 material moves)

                                = $ 150 per material move

Calculation of Activity rate based on Number of setups

Activity rate based on number of Setups = Total estimated overhead costs assigned to Setup cost pool/ Total number of Setups of both Products

                                = $ 78,000/ (91 setups + 169 setups)

                                = $ 300 per set up

Answer 3)

Calculation of Over-costing/ Under-costing of fabric case under traditional costing as compared to Activity Based Costing

Over-Costing of Fabric Case = Overheads assigned to Fabric case under traditional costing - Overheads assigned to Fabric case under Activity Based Costing

                                                          = $ 246,720 - $ 150,300

                                                           =$ 96,420

Therefore Fabric Case was Overcosted by $ 96,420 under traditional costing system in comparison to Activity Based Costing System.