Question

EcoFabrics has budgeted overhead costs of $1,162,350. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 553,500 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 $442,800 and $719,550 is allocated to the design cost pool. Additional information related to these pools is as follows.
Wool

Cotton

Total

Machine hours 123,000 123,000 246,000
Number of setups 1,230 615 1,845
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
$EcoFabrics has budgeted overhead costs of $1,162,3

per machine hour
Design
$EcoFabrics has budgeted overhead costs of $1,162,3

per setup
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
$EcoFabrics has budgeted overhead costs of $1,162,3

$

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

Overhead rates using the traditional approach
$EcoFabrics has budgeted overhead costs of $1,162,3

per direct labor hour

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
$EcoFabrics has budgeted overhead costs of $1,162,3

$

Answer 1

Answer:

Explanation:

Overhead rates based on activity based costing:

Cutting Department; Overhead allocated/Cost Driver

= 442,800/246,000  =$1.80 per Machine Hour

Design Department= Overhead allocated/Cost Driver

=719,550/1,845

=$390 Per Set ups

Overhead allocated:

Wool Product Line =123000*$1.8+1230*$390 =$221400+$479700  =$701,100

Cotton Product Line= 123000*$1.8+615*$390 =$221,400+$239,850  =$461250

Overhead Rate using Traditional Rate

Overhead Rate= Total Overhead/Total Labour Hours

=$1,162,350/553,500  =$2.1

Assuming direct labor hours were incurred evenly between the wool and cotton :

Cost allocation = $276750*2.1=$581,175.

$581,175 will be the cost for Wool and the same for Cotton Product Line.

Hope this helps!