Question

Required information 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 setups Fabric Case 15,000 440 40 Leather Case 9,000 660 80 Total estimated overhead costs are $150,000, of which $110,000 is assigned to the materials handling cost pool and $40,000 is assigned to the setup cost pool. 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?

Answer 1

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Bunker
Answer 1
Traditional method	Fabric	Leather	Total	Note
Labor Hours	15,000.00	9,000.00	24,000.00	A
Manufacturing Overhead			150,000.00	B
Predetermined OH Rate			6.25	C=B/A
Overhead cost assigned	93,750.00	56,250.00		D=A*C
Answer 2		E	F	G	H=F+G	I=E/H	J=I*F	K=I*G
ABC Method			Activity Usages		Overhead cost assigned
Activity cost pool	Activity Measure	Costs	Fabric	Leather	Total	ABC Rates	Fabric	Leather
Material Handling	Material moves	110,000.00	440.00	660.00	1,100.00	100.00	44,000.00	66,000.00
Setups	Number of setups	40,000.00	40.00	80.00	120.00	333.33	13,333.33	26,666.66
Overhead cost assigned		150,000.00					57,333.33	92,666.66
Answer 3	Fabric	Note
Overhead cost assigned- Traditional method	93,750.00	See D
Overhead cost assigned- ABC	57,333.33	See J
Over cost	36,416.67	L=D-J