Question

“Wood Co” Corporation manufactures 2 types of closets to be used in bedrooms, a traditional and a modern type. The below table shows the needed information related to activity and cost: Closet Activity 1 Nbr of Inspections Activity 2 Nbr of Batches Nbr of Direct Labor Hours Traditional 4 20 800 Modern 9 40 200 Overhead Costs $50,000 $100,000 Part 1: “Wood Co” uses a traditional costing system applicable to the $150,000 of overhead costs based on direct labor hours. 1. Compute the total amount of overhead costs allocated to the traditional closet 2. Compute the total amount of overhead costs allocated to the modern closet Part 2: “Wood Co” management would like to change their old way of calculating costs. Therefore, they have decided to use an activity-based costing system where the number of Inspections and the number of Batches are identified as the activity-cost drivers for overhead. 3. Compute the total amount of overhead costs allocated to the traditional closet 4. Compute the total amount of overhead costs allocated to the modern closet 5. Comment on the different obtained results and make a managerial interpretation on the differences between the 2 adopted systems.

Answer 1