Question

EcoFabrics has budgeted overhead costs of $1,077,300. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 513,000 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 $410,400 and $666,900 is allocated to the design cost pool. Additional information related to these pools is as follows.
Wool Cotten Total

Machine hours 114,000 114,000 228,000

No of Setups 1,140 570 1710

Calculate the overhead rate using activity based costing.

Answer 1

Answer:

(a) $1.8 per machine hour

(b) $390 per setup

Explanation:

Given that,

Overhead allocated to the cutting cost pool = $410,400

Overhead allocated to the design cost pool = $666,900

Total machine hours = 228,000

Total number of setups = 1,710

Under activity based costing,

Overhead rate for cutting:

= Overhead allocated to the cutting cost pool ÷ Machine Hours

= $410,400 ÷ 228,000

= $1.8 Per Machine Hour

Overhead rate for design:

= Overhead allocated to the design cost pool ÷ Number of Setup  s

= $666,900 ÷ 1,710

= $390 per set up