Question

Julio produces two types of calculator, standard and deluxe. The company is currently using a traditional costing system with machine hours as the cost driver but is considering a move to activity-based costing. In preparing for the possible switch, Julio has identified two cost pools: materials handling and setup. The collected data follow:

	Standard Model		Deluxe Model
Number of machine hours	26,600		31,600
Number of material moves	630		930
Number of setups	100		580

Total estimated overhead costs are $406,120, of which $202,800 is assigned to the material handling cost pool and $203,320 is assigned to the setup cost pool.

Required:
1. Calculate the overhead assigned to each product using the traditional cost system.
2. Calculate the overhead assigned to each product using ABC.

Answer 1

Answer:
1)
Predetermined overhead rate              = Total Estimated Overhead Costs / Total Number of Machine Hours              =   $ 406,120 / ( 26,600 + 31,600 )              =   $ 406,120 / 58,200 MH              =   $ 6.9780 per MH
	Overhead assigned
Standard Model (26,600 x $ 6.9780 )	$ 185,614.80 (or) $ 185,615
Deluxe Model (31,600 x $ 6.9780 )	$ 220,504.80 (or) $ 220,505
2)
Overhead rate per Material Move              = Material Handling Costs / Total Machine Moves              = $ 202,800 / (630 + 930 )              =   $ 202,800 / 1,560              =   $ 130 per Material Move
Overhead rate per per Setup               = Setup Costs / Total number on Setups              = $ 203,320 / (100 + 580 )              =   $ 203,320 / 680              =   $ 299 per set up
	Overhead assigned
Standard Model ( $ 130 x 630 ) + ( $ 299 x 100 )	$ 111,800
Deluxe Model ( $ 130 x 930 ) + ( $ 299 x 580 )	$ 294,320