Question

EcoFabrics has budgeted overhead costs of $1,143,450. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 544,500 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are cutting (cost driver is machine hours) and design (cost driver is number of setups). Overhead allocated to the cutting cost pool is $435,600 and $707,850 is allocated to the design cost pool. Additional information related to these pools is as follows.

		Wool		Cotton		Total
Machine hours		121,000		121,000		242,000
Number of setups		1,210		605		1,815

Part 1

Calculate the overhead rate using activity based costing. (Round answers to 2 decimal places, e.g. 12.25.)

Overhead rates for activity-based costing
Cutting		$enter a dollar amount per machine hour rounded to 2 decimal places	per machine hour
Design		$enter a dollar amount per setup rounded to 2 decimal places	per setup

eTextbook and Media

Part 2

Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.

		Wool product line		Cotton product line
Overhead Allocated		$enter a dollar amount		$enter a dollar amount

eTextbook and Media

Part 3

Calculate the overhead rate using traditional approach. (Round answer to 2 decimal places, e.g. 12.25.)

Overhead rates using the traditional approach

$enter a dollar amount per direct labor hour rounded to 2 decimal places

per direct labor hour

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Part 4

What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?

		Wool product line		Cotton product line
Overhead Allocated		$enter a dollar amount		$enter a dollar amount

Answer 1

1) Calculation of overhead rate using activity based costing (Amounts in $)

Overhead rates for activity-based costing
Cutting	Total Cost/Total Machine Hours	$435,600/242,000 hrs	$1.80 per machine hour
Design	Total Cost/Total No. of Setups	$707,850/1,815 setups	$390 per setup

2) Allocation of Overhead to each product line (Amounts in $)

		Wool product line		Cotton product line
Cutting		217,800 (121,000*$1.80)		217,800 (121,000*$1.80)
Design		471,900 (1,210*$390)		235,950 (605*$390)
Overhead Allocated		689,700		453,750

3) Calculation of Overhead Rate using Traditional Approach

Overhead rates using the traditional approach

Total Overheads/Total Labor Hours

$1,143,450/544,500

$2.10 per direct labor hour

4) Allocation of Overhead by Traditional Approach

		Wool product line		Cotton product line
Overhead Allocated		$571,725 (544,500*1/2*$2.10)		$571,725 (544,500*1/2*$2.10)

As labor hours were evenly incurred between the products, the overhead allocated to each product under traditional approach is equal.