Question

The Pikes Peak Leather Company manufactures leather handbags (H) and moccasins (M). The company has been using the factory overhead rate method but has decided to evaluate the activity based costing to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.

Total Budgetted factory overhead cost = $440,000

Products	Cutting Direct Labor Hours	Sewing Direct Labor Hours	Set-Ups	QC Inspections	Purchase Orders
Handbags	60,000	60,000	500	200	100
Moccasins	40,000	80,000	300	800	300
Total units	100,000	140,000	800	1,000	400
Budget	$80,000	$240,000	$90,000	$20,000	$10,000

Calculate the amount of factory overhead to be allocated to each unit using activity based costing. The factory plans to produce 60,000 handbags, and 40,000 moccasins.Calculate each activity percentage for two products and apply that to the budgeted cost/activity.

Answer 1

Total Budgeted Factory Overhead is $440,000

On the basis of ABC analysis this amount will be apportioned in ratio of resources used by such products in the following way:

Activity Driver	Ratio	Total Amount	Handbags	Moccasins
Cutting Direct Labour Hours	6:4 (i.e 60,000:40,000)	80,000	48,000	32,000
Sewing Direct Labour Hours	6:8 (i.e 60,000:80,000)	240,000	102,857	137,143
Set Ups	5:3 (i.e 500:300)	90,000	56,250	33,750
QC Inspections	2:8 (i.e 200:800)	20,000	4,000	16,000
Purchase Orders	1:3 (i.e 100:300)	10,000	2,500	7,500
Total Budgeted Cost (A)		440,000	213,607	226,393
Number of units to be produced (B)			60,000	40,000
Cost per unit (A/B)			3.56	5.66