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 setups Fabric Case 18,000 700 40 Leather Case 13,000 1,050 160 Total estimated overhead costs are $254,000, of which $210,000 is assigned to the materials handling cost pool and $44,000 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. (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Overhead Assigned 2. Calculate the overhead assigned to the fabric case using ABC. (Round activity rates or activity proportions, and intermediate calculations to four decimal places.) Overhead Assigned 3. Was the fabric case over- or undercosted by the traditional cost system compared to ABC? Fabric Case

Answer 1

1) Traditional Costing

Overhead Assigned under traditional costing = 254000 / 31000 * 18000

= 147484

2) ABC Costing

Material handling rate = 210000 / 1750 = 120 per move

Setup Cost = 44000 / (40+160) = 220 per set up

Overhead assigned to ABC = ( 700*120) + (40 * 220 ) =84000 + 8800 = 92800

Note- Here , in this problem "number of setups" in Leather case is not clearly visible . According to my vission it is may be 160 .

If it is 100 then setup Cost = 44000 / 140 = 314.2857 per set up

Also , Overhead assigned to ABC = (700*120 ) + (40*314.2857) = 84000 + 12571.4285 = 96571.4285

If it is 180 then setup Cost = 44000 / 220 =200 per set up

Also, Overhead assigned to ABC = (700*120) + (40*200) = 84000+8000 = 92000

3) Fabric case is over costed under traditional costing system compared to ABC .