Question

Sunland 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
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 $1,077,3
per machine hour
Design
$EcoFabrics has budgeted overhead costs of $1,077,3
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 $1,077,3
$EcoFabrics has budgeted overhead costs of $1,077,3
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 $1,077,3
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 $1,077,3
$EcoFabrics has budgeted overhead costs of $1,077,3

Answer 1

Answer:

1. Cutting 1.8 per machine hour

Design 390 per setup

2.Wool product line $689,700

Cotton product line=$453,650

3. $2.1 per direct labor hour

4. Wool product line $571,725

Cotton product line $571,725

Explanation:

1) Calculatation for the overhead rate using activity based costing

Overhead rates for activity-based costing for Cutting=($425,600/242,000)

Overhead rates for activity-based costing for Cutting= 1.75 per machine hour

Approximately 1.8 per machine hour

Overhead rates for activity-based costing for Design= ($707,850/1,815)

Overhead rates for activity-based costing for Design = 390 per setup

2) Calculation to Determine the amount of overhead allocated to Wool product line

and Cotton product line

Overhead Allocated:

Wool product line=(121,000*1.8)+(1,210*390)

Wool product line=217,800+471,900

Wool product line= $689,700

Cotton product line=(121,000*1.8)+(605*390)

Cotton product line=217,800+235,950

Cotton product line=$453,650

3) Calculation for the overhead rate using traditional approach.

Overhead rates using the traditional approach = $1,143,450/$544,500

Overhead rates using the traditional approach =$2.1 per direct labor hour

4)Calculation for the amount of overhead that would be allocated to the wool and cotton product lines

Overhead allocated:

Wool product line=($1,143,450/2)

Wool product line=$571,725

Cotton product lines=($1,143,450/2)

Cotton product line=$571,725