Question

EcoFabrics has budgeted overhead costs of $963,900. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 459,000 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 $367,200 and $596,700 is allocated to the design cost pool. Additional information related to these pools is as follows. Wool Cotton Total Machine hours 102,000 102,000 204,000 Number of setups 1,020 510 1,530 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 $ per machine hour Design $ 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 $ $ Calculate the overhead rate using traditional approach. (Round answer to 2 decimal places, e.g. 12.25.) Overhead rates using the traditional approach $ 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 $ $

Answer 1

Solution 1& 2:

Determination of overhead rate and allocated overheads to product lines - Activity based costing
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Wool Product line		Cotton Product line
					Usage	Allocated Costs	Usage	Allocated Costs
Cutting	$367,200.00	Machine hours	204000	$1.80	102000	$183,600.00	102000	$183,600.00
Design	$596,700.00	Nos of setups	1530	$390.00	1020	$397,800.00	510	$198,900.00
Total	$963,900.00					$581,400.00		$382,500.00

Solution 3:

Overhead rate per direct labor hour using traditional approach = Budgeted overhead /Budgeted direct labor hours

= $963,900 / 459000 = $2.10 per hour

Overhead allocated to wool product line = (459000*50%*$2.10) = $481,950

Overhead allocated to cotton product line = (459000*50%*$2.10) = $481,950