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 Number of machine hours Number of material moves Number of setups Standard ModelDeluxe Model 30,800 890 540 25,800 590 70 Total estimated overhead costs are $347,100, of which $170,200 is assigned to the material handling cost pool and $176,900 is assigned to the setup cost pool. Required 1.Calculate the overhead assigned to each product using the traditional cost system. (Round the overhead rate to four decimal places.) Overhead assigned Standard Model Deluxe Model 2. Calculate the overhead assigned to each product using ABC Overhead Assign Standard Model Deluxe Model

Answer 1

1)
				Overhead assigned
	Standard Model			$       1,58,219
	Deluxe Model			$       1,88,881
Working:
	As per traditional method,
	Overhead rate		=	Total overhead/Total number of activity driver(Machine hours in this case)
			=	$       3,47,100	/	(25800+30800)
			=	$           6.1325
	Overhead assighned to:
	Standard Model		=	25800	x	$             6.1325	=	$       1,58,219
	Deluxe Model		=	30800	x	$             6.1325	=	$       1,88,881
2)
				Overhead assigned
	Standard Model			$           88,150
	Deluxe Model			$       2,58,950
Step-1:Calculation of cost per activity driver										Total number of driver			Cost per activity driver
				a		Number of cost driver				b			a/b
Overhead		Cost driver		Amount of overhead		Standard Model		Deluxe Model
Material handling costs		Number of material moves		$       1,70,200		590		890		1480			$ 115.0000
Set up costs		Number of set ups		$       1,76,900		70		540		610			$ 290.0000
Step-2:Overhead assignment to each product
Material handling costs:
Standard Model		590	x	$      115.0000	=	$             67,850
Deluxe Model		890	x	$      115.0000	=	$          1,02,350
Set up costs:
Standard Model		70	x	$      290.0000	=	$             20,300
Deluxe Model		540	x	$      290.0000	=	$          1,56,600
Thus, total overhead assigned to:
Standard Model		$                67,850	+	$           20,300	=	$             88,150
Deluxe Model		$            1,02,350	+	$       1,56,600	=	$          2,58,950