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Waymire Ltd. manufactures two products and currently allocates overhead based on direct labour hours. For the...

Waymire Ltd. manufactures two products and currently allocates overhead based on direct labour hours. For the coming year, the company is considering changing to an activity based costing system by allocating overhead based on 3 activities. The estimated amount of overhead traceable to the 3 activities for the coming year are given below: Activity Cost driver Cost Product 1 Product 2 Purchase orders # of orders $881100 262 580 Maintenance Machine hours $408064 19261 17597 Inspection # of inspections $704263 1534 2210 Total estimated direct labour hours for the coming year are 26748 hours for Product 1 and 88690 hours for Product 2. What is the difference between total overhead allocated to Product 2 using activity based costing versus traditional costing? Note: a negative number indicates less total overhead allocated using activity based costing. Select one: a. $-775962 b. $-755570 c. $-314067 d. $314067

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Answer #1

Total cost = 881100+408064+704263 =1993427

Total hours = 26748+88690= 115438

Allocation based on direct labour for product 2=total cost/total hours*product 2 hours

= 1993427/115438 *88690= 1531532.43 or 1531532(rounded)

Activity based:

Purchase = 881100/(262+580)*580=606933

Maintenance= 408064/(19261+17597)*17597=194820.73 or 194821 (rounded)

Inspection=704263/(1534+2210)*2210=415710.80

=415711(rounded)

Total cost = 1217465

Less overhead allocated under activity based

= 1217465-1531532

=314067 (negative)

Option c is correct.

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